Saturday, March 21, 2009

Obama Ignores Decade of Stock Option Cheating in Revising Executive Pay

Thirty percent of executives backdated stock option grants, once cited as the most pure form of pay for performance. Backdating is unethical and frequently illegal under SEC rules. Few executives were charged with crimes for their decade of backdating. Many returned their ill begotten gains.

The Obama administration considers changing executive pay practices. The NYT reported:

One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.

Executives already failed by cheating on the most pure form of aligned incentive compensation. The financial interest of the company is to focus on customers, improving existing processes and innovating to give the customers things they don't know to ask for. Incentive pay harms both efforts.

Executive incentive compensation caused CEO's to undertake riskier strategies. Financial firms produced junk vaporware products. Quality was abandoned to keep the money wheel churning. Much of the junk was produced by major investment banks. When the crisis hit, all but a failed Lehman Brothers fled to the safe waters of commercial banking, which provided immediate capital injections.

The groups left unregulated include hedge funds and private equity. The NYT piece addressed hedge funds, but makes no mention of private equity underwriters (PEU's). With The Carlyle Group's David Rubenstein and Arthur Levitt heading financial reform efforts, it's no surprise the PEU boys get a free pass.

Greed and leverage took down the system. PEU's were a major primer of the greed and leverage pump. The big money boys win again. Obama corporafornicates in Bush-like fashion.

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