A.I.G. in the news again with executive pay

It’s not like me to be wishy-washy about much of anything.  But today, I got a little wishy-washy on what the right answer is relative to fixing executive pay.  Sunday’s paper had an interesting article by Gretchen Morgenson that reported findings that executive pay changes in recent months have actually tilted more toward short term rewards, seeming to suggest that executives are going to be incented to take more of the same kinds of risks that contributed to getting us into the current financial mess. This editorial in the paper today about Ms. Morgenson’s piece says it pretty well in the title “More Business As Usual.”

Then as I made my way to the business section, I read this article about the new A.I.G. CEO who will be paid at least $7 million a year.  I was frustrated to read that Kenneth R. Feinberg, who heads up the oversight group on executive pay had given it preliminary approval.  Since the U.S. government now owns 80% of the insurance giant, I would have expected a lot lower base salary (it is $3 million) and much more of the long term incentives Ms. Morgenson wrote about.

I was pretty frustrated that the government would allow this, and that A.I.G., would have the arrogance to do this in broad daylight, or even hoped that this new CEO, Robert H. Benmosche might actually act in the best interests of his shareholders (which is, of course, his job) and suggest a different structure.

Then I looked at it the other way.  If Mr. Benmosche is guaranteed his base salary of $3 million, why on earth would he take any risk at all (risk being a big part of why A.I.G. and others got into so much trouble in the first place)?  Sure, it would be great if the stock held or improved and he would get his annual $4million in stock, but that’s just gravy.  A lot of gravy I will admit, but still gravy.

Now maybe Mr. Benmosche will get lazy and not do anything for his base of $3 million a year, but to the point of Ms. Morgenson’s article I expect that until we get a better handle on the best ways to motivate executives to drive shareholder value, we will see several experiments in exec pay before the pendulum stops swinging.

-Ric