"White House Appoints "Czar" to Oversee Executive Pay"

My jaw just about hit the floor when I saw this headline several weeks ago in the NY Times and Wall Street Journal.  I know we have a drug czar, and an auto czar, but a compensation czar? (And aren't czars from old-world Russia?).  What's the world coming to? 

Now that the new Pay Czar is firmly in place, he's making his impact felt.  In addition to reviewing and setting guidelines for many of the largest bailout companies, he most recently got departing Bank of America CEO Ken Lewis to forgo his salary and bonus for this year.  While I'm certain not a fan of Mr. Lewis, it does raise government intervention into individual pay determination to to a new and disconcerting level.

The mixed messages and changing tunes on executive compensation coming out of Washington these days are enough to keep my head spinning, but this is a case of the Feds clearly over-stepping its bounds (and its expertise).

It seems to me that there has been a lot of attention (obsession?) paid to regulating executive compensation, instead of the far larger issues of regulating the the reckless use of financial leveraging, structured investments, securitization, and the rating agencies that helped create all of the "AAA" rated mortgage securities (that many turned out to be nothing close to investment grade).  And what has happened to the "risk management" profession (which was completely asleep at the wheel on this one)?

A very good article in the WSJ (subscription may be required to view article) on "Risk vs. Executive Reward" says it well.  Not even the experts (the people who work with and manage executive compensation plans regularly) can agree on cause-effect relationships of risk vs. pay, and when risk becomes "excessive."  A recent study by Watson Wyatt even debunks many of the conventional belief systems around risk and reward.

The keys issue to me are:

• The government has virtually no expertise in executive rewards, incentives, or compensation (just look at their own reward and performance management systems!).
• Companies should determine their own compensation plans (within the tons of rules and regulations that already exist), period.  It's called self-determination, and the feds want to take that away.  Let the "Say on Pay" movement handle shareholder dissatisfaction with the plans that are developed for public companies.
• Let Washington regulate the financial markets, and financial risk within financial and related institutions, but how a business chooses to drive performance and pay for that performance should be (mostly) none of their business.
• Executive compensation is already one of the most heavily-regulated and complicated areas in business already, with the intersection of financial reporting and disclosure, accounting regulations, taxation issues, securities law, all focused on this topic already.

Of course, there certainly have been some abuses, and most have taken a beating in the press (and other places) for it. But since when has just about anybody in Washington shown a true facility for running a real business, or determining how to incent performance?  Best I can tell, the Feds haven't even learned how to manage non-performance at the federal employee level yet, let alone managing business performance, or managing a business that has to earn a profit to survive (unless you're bailed-out by the Feds, of course!).

Granted, virtually all of this was happening under the noses of the executives currently being excoriated, but it certainly wasn't their compensation plans that lead us to the mess we are in today (and while many made millions during the latest bubble, they also lost many millions more when that bubble popped as well).

There is a lot of hard work that needs to be done to fix our financial system, but regulating executive pay is a bit issue compared to multi-trillion dollar mess than was created by horrible risk management, irresponsible business practices, the over-use of leverage and fancy Wall Street financial packaging that should all be regulated more closely.

OK, I'm getting off my soap box... Whew! I feel better already...