The Leadership Failure That Led to Salary Caps
Heineman
The anger over executive pay stems from any number of sources: the apparent lack of penalty to executives who caused the credit crisis and the financial services meltdown; the pay systems that rewarded paper-churning and greed, not risk management and value-creation; the seeming inability or unwillingness of companies that caused the problem to loosen credit since the fall; and the tone deaf symbolic acts (plane purchases, office decorations and billions in bonus) that the sector was too insensitive to explain (even if good explanations were to be had, at least as to planes and bonuses for some who deserved them).
But more profoundly, the failure of financial sector leadership is what has led us to the [Sen. Christopher] Dodd Amendment [to the stimulus package, which says that TARP companies that receive more than $500 million are prohibited from giving the top five officers and 20 most highly paid employees a bonus of more than one-third of total annual compensation - and that bonus must be in restricted stock which doesn't vest until the government is repaid.].
Almost no financial services CEOs or board leaders have stood up and said, “Here is what went wrong. Here is how compensation contributed to the problem. Here is how we are going to fix it.”
The need for such constructive candor has been obvious for six months. But instead of candor, in general we’ve gotten silence. Even when the eight financial service CEOs testified before Congress, their written testimony had very little analysis, if any, on executive compensation - even as the storm warnings were everywhere, including just down the corridor in the Conference Committee.
Such a forthright discussion couldn’t have stopped action in Washington on executive compensation, but it might have been enough to let the administration’s more-nuanced, less-punitive initiative take root.
In sum, the Dodd Amendment will feed the populist impulse but, as a policy matter, may well impair efforts to fix the financial sector, unless the administration can work out some future modification. But financial sector leaders bear heavy blame - not only for causing the problem, but for failing to confront exec pay reform candidly, leaving its shape and direction to the political whirlwinds which sweep through the halls of Congress in times of stress.
Ben Heineman Jr. worked for GE for nearly 18 years, most recently as senior vice president for law and public affairs. He is currently a senior fellow at Harvard’s Kennedy School of Government, a distinguished senior fellow at Harvard Law School and senior counsel to the law firm of Wilmer Hale.
*Read the full story in the Harvard Business Review Editors’ Blog.
Last 5 posts by Ben W. Heineman Jr.
• Beyond What the Rules Require - December 15th, 2008
• Engaging Company Leaders - December 8th, 2008
• High Performance, High Integrity - December 2nd, 2008
