Approximately one year ago I blogged about excesses in executive pay (see Revisiting Executive Pay). Executive pay has been a hot-button topic in recent years, with the remuneration of top executives exceeding that of average workers by more than 150 times between 1995-2005 (compared to a long-run average of around 50 times between 1950-1990).

Since August of 2007, executive pay has taken a bit of a back seat to other, more salient topics (e.g., anything with the words “credit” or “crunch” in it). So I was surprised to learn about a recent inquiry into executive pay on Capitol Hill, …until I learned that the words “credit” and “crunch” were also involved (see 3 CEO’s made $460 Million). Angelo Mozilo, Stanley O’Neal, and Charles Prince were called in to testify today in front of the House Committee on Oversight and Government Reform about their “out-sized” pay packages in the midst of the credit crunch.

Back in March of last year, I suggested that there were several factors contributing to “out-sized” pay:

1. The nature of the shift over time in shareholder profiles (from a traditional long-term individual investor to a more short-term institutional trader)
2. The fundamental misalignment in incentives created by the differences between the accounting view of the firm (infinite lifespan) and the tenure of the average CEO (less than 4 year lifespan), and the inability of stock options to alleviate this short-term/long-term incentive problem (see especially my post A New Approach to Executive Compensation)
3. Poor (or at the very least disinterested) governance on the part of the board members in general (and the compensation committee specifically)

With respect to Mozilo, O’Neal, and Prince, the relevant question then becomes – were their pay packages so outrageous or significantly excessive when compared to their peers (other CEO’s) such that they would constitute criminality? My hunch is that the answer to that question is – No.

Now don’t get me wrong, I’m not condoning their pay. Those pay packages, although not exactly criminal, were certainly in bad taste. What I am suggesting however, is that to the extent that we have a problem of excessive executive pay (and I do think we have a problem), the problem is a general, economy-wide problem, not a problem specific to Countrywide, Citigroup, or Merrill Lynch.

Not surprisingly, some variation of this theme is exactly what those folks claimed in their testimony today (see Puzzling Pay Packages or Top Bank Executives Defend Pay). My guess therefore is that this line of inquiry will be short-lived. Quite frankly, it has little teeth.

What would be more consequential, however, is if Mozilo, who when he sold $150 million of his Countrywide stock back in 2006, did so while possessing material, non-public knowledge of an imminent credit crunch and its probable impact on Countrywide. But then that would not be an issue of excessive executive pay, but rather, one of insider trading.

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This entry was posted on Friday, March 7th, 2008 at 5:15 pm and is filed under Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.