Biggs on executive compensation

John Biggs of TIAA-CREF fame has just made a rather timely posting of his paper from the Columbia conference on the Bebchuk-Fried book, Executive Compensation: Perspectives from a Former CEO.

Biggs makes a couple of interesting observations. First, he says that when T-C pushed for performance-based stock options (non-use of which Bebchuk and Fried say supports their "managerial power" model of compensation), it was met with the objection that these, unlike conventional options, would have to be expensed:

The uncertainty about how to compute the expense charge . . . led CEOs to strongly protest any proposed plan that did not use conventional stock options. . . . .The TIAA-CREF economists, lawyers, accounting experts, and I met with the Financial Accounting Standards Board (FASB) research staff in the mid-1990s to press for the same favorable (i.e., non-expensing) treatment of performance stock options. We were firmly rebuffed.

If Biggs is right, the "managerial power" model may be, at least in part, a regulatory artifact. Something to consider as we think about still more "reform" of compensation.

Second, Biggs points out that

[a]nother perverse byproduct of stock option dominance was the decline, and in many cases the disappearance, of dividends.

He notes that dividends didn’t increase even after tax changes making them more attractive, attributing that to the dominance of stock options in executive compensation:

One dollar per share in dividend payment, of course, reduces the value of stock by roughly one dollar. . . . .Is it surprising that managers heavily compensated by stock options would oppose such payments? The herd supported this result. All the other companies held down their dividends.

Biggs suggests restricted stock as providing more balanced incentives, and making executives act more like real shareholders. I wonder whether the SEC proposal will have any effect on this. I suppose it depends on what the “herd” does – since the herd will be ever more important as compensation is nailed into neat little tables.

More importantly, I don’t think compensation alone will produce more dividends, since it’s unlikely that managers will ever have the same incentives as shareholders. Which is why I’ve suggested the answer, at least for some firms, may be binding governance provisions requiring regular distributions.