Thursday, January 5, 2012

Should a Corporation Be Able to Claw Back Executive Compensation If the Stock Crashes Due to Market

Due to the political rhetoric of class warfare it seems as if the public doesn't want executives to earn big bonuses and high salaries. Many in Washington DC, especially the politicians that are socialist leaning want to curb these excess bonuses and payments to the boards of directors, and executive management. Still, most of those in the corporate world and investment world believe that it should be up to the shareholders to decide. Okay so let's talk about this shall we?

It is amazing when shareholders are asked to vote, they will often approve big bonuses, huge stock options, and higher salaries for executives that increase the stock price in any given quarter or year. The shareholders could be said to be greedy, but they own the company, and who is to debate that? They own the company, and they should decide how much the corporate executives are paid, not politicians in Washington DC, or the 99% who are occupying the park who don't actually own any stock in the company. You see my point?

Another interesting issue of contention is that often when the market is in full swing, in a bull market, many of these corporations make hand-over-fist in quarterly profits, and the stock price rises dramatically, even though the executives running the company had very little to do with it. During these periods the executives also get bonuses, often bonuses they do not deserve.

Incidentally, it is common for minority shareholders to file class-action lawsuits requesting to claw back the bonuses from executives after the market falls, the profits collapse, or the economy tanks. Should a Corporation be able to claw back executive compensation if the stock market crashes? It doesn't seem realistically fair to do so, but then again it isn't really fair to overpay and get huge bonuses to executives that had nothing to do with the increase of stock price during a bull market either.

Now then, whose fault is all this anyway? It seems to me that it's everyone's fault, but more so it is a snapshot of our society looking for short-term gain over long term value, profitability, and growth. Executives should not be rewarded for something they didn't do, nor penalized for something that isn't their fault. Nevertheless, they should see the road signs ahead, the writing on the wall, and position the company in a safer realm prior to the downturns, just as they should to make hay on the upswing.

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