May 21, 2006
Letter to SEC:
As a financially conservative Republican, I have followed with mixed emotions the recent furor over CEO pay issues. Here are the competing basic issues as I see them:
1. Government shouldnt tell a company how much to compensate a CEO great ones can be worth many multiples over even a high salary to shareholders.
2. On the other hand, lavish CEO pay is a direct cost to shareholders, and just how much more effective is someone for say 20 million vs. 10 million dollars a year?
But here is the crystal clear fact I am sure of: Current compensation machinations are an attempt to obscure the total pay with complex structures under the excuse of pay for performance.
Hence I offer a simple contract that could become a standard, similar to the tables for mutual fund expenses:
CEO Compensation Contract for Hypothetical XYZ Co.:
Top Three CEO Expenses:
COMPANY XYZ compare Vs. Industry Average
1. Baseline Salary per year
2.Stock Allocation per year
3.Benefits (health ins, travel, all other perks etc.)
4.Total CEO Compensation (TCC)
5.Stock allocation as % of total compensation .
6.TCC as % of last years earnings
7.Compensation of top three Executives (CT3) as % of last years earnings
Notes to above.
1. Stock is bought on the open market monthly or quarterly at a specified date (10th or 24th of month etc.) No Options.
2. Stock must be held for 3 years after purchase.
The Total CEO Compensation as a % of total earnings will give some perspective to their salary and can be compared against the Industry average.
The Total Compensation of the top three executives (CT3) as a % of total earnings can also be compared against the industry average.
If the top three can be prevented from looting the company the shareholders may have a chance.
A higher Stock Allocation as % of total Compensation is generally favorable.
Note to compensation committee: Meetings will be short and infrequent.
Note to Shareholders and Analysts: Lower Expenses are almost always better.
Matthew Pompeo MD
See next page for Microsoft word version with table