Solution to misaligned executive compensation: bonus ’em in bonds

Another day, another story of outrageous compensation being bonused out to bankers. See: Barlcays Bosses get $53.2 million in shares.

“Barclays PLC on Tuesday said it gave £32 million ($53.2 million) in shares to a dozen of its top executives, including a £3.8 million pay award to Chief Executive Antony Jenkins, amid a growing controversy with shareholders over its pay practices.”

Why do we care how much corporate boards agree to pay executives? Because the style du jour is to pay them largely in share options, pay that only appreciates when share prices go up. May sound smart, but its not. A focus on perpetually goosing share prices means higher and higher leverage, more and more reckless risk-taking, and a focus on adding debt in order to buy back one’s own shares rather than investing in the long term vision and nurturing of a sustainable business model. So called “activist equity investors” have the same destructive predilection–hence they are constantly pushing for short-term ways to extract cash, rather than long term investment and business building.

We, the real economy, all pay dearly for executive pay structures that want higher share prices at all costs. This is particularly true when it comes to investment bankers and car manufacturers where taxpayers have been repeatedly abused as the bailout of last resort when reckless business models finally implode.

There is a much better way to turn this reckless chapter around and focus executive ‘talent’ on prudent investment and long-term management. First break up too big to fail, so managers no longer view the public purse as their personal trust fund. Second, pay the executive bonuses not in shares, but in the bonds of their corporations. Instantly the MBA mind will be turned away from an obsession with relentlessly plundering scarce capital into short-term “trades” and price manipulation, towards an obsession with stability, solvency, careful leverage, paying down debt-rather than levering up, stewardship, risk controls, sustainable growth, long-term survival and investment, return on capital (rather than just return on equity).

A simple, beautiful, elegant solution, that will build lasting economic strength, jobs and investor wealth. Yes we can.

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