Saturday, October 10, 2009

Executive Pay

David Yermack, an NYU finance prof, has an excellent article in today's WSJ about executive pay. Yermack has been critical in the past of executive compensation - he wrote a very interesting article about the uses and abuses of corporate jets.

His article today makes a simple and often overlooked point. You have to include the value of past stock and option grants when figuring out how execs are compensated. You cannot just focus on this year's salary.

Many executives lost massive amounts of personal wealth when their company stock prices collapsed. No one feels bad for them as this is true pay for performance. Shareholders lost money and so did they.

Overall Yermack concludes that CEO compensation contracts work pretty well and the current witch hunt, which might be good for the media and some political careers, really won't make things better.