Defining Fraud – CEO Compensation vs. Performance

Amidst the sorting congress will have to do, is an issue many taxpayers who are currently being put at risk are concerned about.  Namely, “how in the hell do those CEOs rate multi million dollar go away presents when the companies are bankrupt?”  After taking a pay cut in 2007, Henry Mudd of fannie Mae still made 14 Million while watching the ship which he was steering sink ever more towards where the water flows off the ends of the earth.  Yes, aside from the story which bears his name, (yes, he IS RELATED, though not a direct descendant of convicted conspirator, then pardoned, Samuel Mudd of Wilkes Booth notoriety) he could certainly give new meaning to “your name is Mudd.”

CEO compensation has been a hot issue which has seemingly been hard to tackle, and is frequently used in political debate (usually against free market types) to deride the other side for their complicity in the great reward of wealth for less than satisfactory performance.  Rightfully, many wonder why the heads of these companies should receive what is considered unheard of pay, sometimes in 7-8 figures by those of us common folk who still fall into the 5 or less range.

A Perfect example, was Former K-Mart CEO Charles Conaway, who walked with more than $20 million in salary bonuses and severance payments after less than two years with the retailer which shortly after declared Bankruptcy.  K-Mart WAS a Michigan company, and the stockholders found themselves looking at a truly messed up (this story is to long to continue at this time) result after the dust settled. He got the cash, The stockholder got the shaft.

Congress, which for the most part bears as much responsibility for the recent collapse of financial institutions by reducing the restrictions of qualifiers, and apparently REQUIRING lenders to offer high risk loans, now must decide under what conditions it will accept the responsibility of liabilities these institutions have put forward.  The conditions under which the taxpayers will now accept the aforementioned liabilities which are resting in the hands of what might be considered the bought and paid for hand maidens of those same institutions.  Will those who drove the vehicles we know as Fannie Mae and Freddie Mac to the bottom of the lake survive financially? Likely so, and with prejudice.

So how do we prevent unwarranted compensation from happening?  What possible FREE MARKET solution could there be to provide relief for stockholders when things go terribly, terribly wrong?  And finally, what course of action do we take when the government must pick up the pieces to avoid further injury to stockholders, taxpayers, and the general economy as well?

The Answer, at least to not rewarding the failed Executives, is in the free market philosophy.  While taking away the right of the shareholder to negotiate the best possible agreement with the prospective CEO or officer is unacceptable, there must be a measure of performance, under which the stockholders have a “reasonable” expectation of reaching stated goals.  For example: A CEO while negotiating his position with the board claims he can do “X, then Y, and achieve Z” as a minimum.  A base salary, and whatever arrangement can be made.  However ,if those “minimum goals” are not met, has the Executive then reneged on his responsibility, and not earned the contracted rewards?  IF the board still rewards the CEO, are they not participating in defrauding of the owners of the business?

LAW as written by a reasonable body of Congress (if there is such a creature) to determine the point in which FRAUD has been perpetrated on at least the stockholders, can be used to hold the failing executives accountable.  Congress does have the authority, and quite frankly the responsibility, to hold those who under false presentation not only fail to perform as promised, but raid the treasuries of business as well, in contempt.  The promise of limited government is not that which keeps all hands off in business affairs, but rather protects those individuals against those who would damage them, either in business or in government alike.

Though not entirely perfect, congress CAN do that which its original charter intended.  Protecting us from ourselves? No.  Protecting us from those who would do us harm.. Aye.