On Big Paychecks and The SEC

Last summer, The Securities and Exchange Commission sent letters to some hundreds of companies asking the way they described executive compensation. But now, The SEC doesn't seem so happy with the answers it has received so far. This is of course, due to the reason that some companies may not want to uncover some of their secrets related with individual (CEO) compensation so they switched to systems applying ratings to performance targets. But SEC, still, does not find those explanations reasonable and is asking for (more) “substantive analysis and insight” from many of those companies.

The thing SEC is trying to do is to give more information to shareholders and public about executive pay, after years full of scandals on excessive “high-profile pay packages”. But I have to say that this approach has the possibility to mislead many institutions in a way which also led a great number of dot.com companies to collapse.

Pushing companies to move towards indicators that only take turnover and stock price into account and away from individual performance indicators, may make the executives substitute short-term financial goals for long-term success and durability of their companies. It might, in the end, “corrupt” how companies are managed. (Have a look at this January 2007 post.)
Financials are of course a vital part of the indicators for a company's measure of success but they are not the only ones. There are many other important factors to be considered like, corporate governance and social responsibility. These actually, when successfully managed, could easily make a company sell.

When we look from the reason side, these huge compensation packages are actually crops of supply and demand resulted from the competition for the most talented managers in the market, which is mostly a consequence of the rise of private equity. The solution might be giving the shareholders a greater say in deciding the executive pay and letting them contribute to their own proxy statements.