Christopher Kutz

Market-based morality

Demands for reduction in executive pay have stemmed from taxpayer
anger at what President Obama has called the "greed and
irresponsibility" of those whose decisions led to catastrophic
risk-taking. But there may also be room for an incentive reform that's
more powerful than a pay cut.

Performance-based compensation has been widely accepted as a way to
align manager and shareholder interests. But even when it genuinely
ties pay to long-term earnings, it usually comes with a high floor:
executives fail upward, with golden parachutes and lateral job offers.
While they profit from their firms' gains, their losses are borne first
by their shareholders - and now by taxpayers.

So let's require firms that want to pay in stock options to include
a liability component as well, so that executives share both in the
upside and downside risks. Liability would force managers to account
for the risks they take with other people's money. Performance pay
could take the form of a new class of stock options with a residual
liability for the firm's debts, in proportion to an executive's
ownership stake. Or employment contracts could simply be written to
include a limited indemnity for the firms' creditors.

The risk that executives bear would then be in proportion to their
ownership interests. Such compensation would comport with both the
basic moral good sense that we should help clean up our own messes, and
would discourage excessive risk-taking without artificially removing
incentives for improved performance. Thus, market-based incentives and
morality can work in combination, not in competition.

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Christopher Kutz is a professor of law at the UC Berkeley School of Law.

Much more...http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/01/24/INT315F820.DTL