Corporate governance in the financial sector (& elsewhere): executive compensation

I have a modest proposal for aligning executive compensation better with shareholder interest.

Each year, at the annual shareholders meeting of any listed company (not just in the financial sector), shareholders vote, as a series of line items, on last year’s and next year’s compensation for top management and top staff.  A concrete implementation would be as follows:

  1. The total compensation package for each of the 10 top executives and for each of the 10 best-paid staff (where these categories don’t overlap) for the coming year.  The individual compensation package package that is voted on includes all benefits, in cash or in kind, unconditional, or conditional/contingent that the executive/employee is entitled to in the coming year plus any changes in the total compensation package for subsequent years.
  2. An independently audited report on last year’s total compensation package for each of the of the 10 top executives and for each of the 10 best-paid staff (where these categories don’t overlap).  This report should contain an independent estimate of the difference between each individual compensation package approved at the previous shareholders meeting and the compensation actually paid or accrued.  That difference, positive or negative, would have to be added to or subtracted from the compensation package about to be approved for the coming year (this second set of line item votes could, of course, only be started in the second year of the new arrangement).
  3. The rest of the annual report can be accepted even if the individual compensation packages are not approved.
  4. If an individual compensation package is not approved, the total compensation for the executive/employee in question will be the total compensation of the head of state or head of government (whichever is lower) of the country in which the company is registered/incorporated.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website