Executive compensation – in particular, compensation for high-ranking financial services executives – has been garnering a lot of attention lately, and for all the wrong reasons.
We’ve always believed that you really do pay for what you get, and to get a top-performing executive, a company simply must pay him or her what’s due. Basic economics says that if one company will not or cannot pay an executive what he or she deems appropriate, said executive will find someone who will. Pay, or don’t pay, at your own peril.
We have absolutely no problem with this.
But, nascent recovery be damned, a great number of folks seemingly do. The ferocious outcry over what was thought to be excessive financial service executive compensation when the bottom fell out of the market in 2008 still echoes today.
But the reactionary measures taken by federal authorities in the wake of the market’s collapse and as a result of this public outrage illustrate a fundamental – and surprising – misunderstanding of the American business environment.
Much of the latest round of federal regulations aimed at the financial services industry has been focused on the country’s largest institutions – those famously determined to be “too big to fail.”
As part of the Dodd-Frank Act, and under proposed rules that are still being formulated, any financial institution that is teetering on insolvency and deemed to be of systemic risk to the financial stability of the country can be placed into receivership with the FDIC. When that happens, the FDIC is in a position to repudiate or rescind contracts it deems burdensome to the company in question, including compensation agreements. Further, any individual determined to be substantially responsible for the failure of the company can be forced to return two years of compensation, whether there is a finding of negligence or not. Importantly, this applies to current or former senior executives or directors.
From a lay perspective, this probably seems just. Cries have largely centered around a desire to “hit ’em where it hurts” when prosecuting failed executives – ie, in their wallets.
But one doesn’t reach the highest levels of corporate America without first learning how to cover one’s, well, assets. And this is where federal grandstanding falls short of understanding, and more importantly addressing, the problem.
Financial executives aren’t the only folks gazing into crystal balls and determining strategies for future profitability in a changed corporate environment. Insurers are doing the same thing, and these latest rules may just have opened a lucrative new revenue stream.
Insurance broker Marsh, a subsidiary of Marsh & McLennan Cos., has reportedly introduced a new supplement to traditional D&O insurance coverage aimed at those officials whose private assets may now be at risk because of the new FDIC authority.
The new coverage would ensure that executives receive payment for compensation they were not paid if a contract is repudiated. It also covers the clawback provision of repayment of salary. The coverage, of course, does not cover criminal acts, but it’s an unspoken reality that the line between what’s criminal and what’s merely unsavory or unethical is exceptionally murky at these levels.
Essentially, in one perfectly legal fell swoop, Marsh has negated what some had probably hoped would be the harshest, most effective penalties for failed executives. And where Marsh is going, others are sure to follow.
We would have hoped that federal authorities would have considered this countermove on behalf of insurers and their clients. It’s not like D&O coverage is a new idea, and this latest enhancement makes perfect sense.
Top executives at broken firms should be held liable for their actions and their consequences. But this move to punish them financially not only illustrates a seeming naivete on behalf of regulators, it is also indicative of a larger, hugely flawed policy of reactionism, rather than the necessary pre-emption for which these troubled times are screaming.
