Subject: File No. S7-10-09
From: weizhong jiang
Affiliation: cboe

June 17, 2009

My comments cover two separate subjects that are related to what SEC is soliciting comments on: one is Executive pay and the other is stock/option grant to executives. The relationship between board of directors and executives will always be closer than that between board of directors and public investors. Thus, while the proposal is encouraging for the public investors but I have doubts it would be sufficient to prevent excessive risks being taken like what we just saw.

I would not have problems with how high the chief executives pay can go. I am a free market believer. The issue is how much we relate the pay with performance. These days getting to be one of the chief executives is no worse than winning a lottery. Even if someone fails the business the first day he or she starts the position, the severance package alone is worth ridiculous amount. I believe there are intelligent executives are under paid while others are grossly overpaid.

Regarding stock/option grant, if I understand correctly, it was supposed to tie executive performance with stock performance. There are two main loopholes. First I fail to see good positive correlation between stock performance and executive performance. Lot of grants is auto exercise. It is the shares that are given to executives at very low price or at no cost then they sell them INSTANT. Diluting shareholder value is a side effect, but a more prominent failure is that it fails the original purpose, that is to tie executive pay to stock performance. If anything, it hurts stock price. Secondly no matter how we look at, executives are insiders.

If we really want to tie business performance to executive pay using stock performance as barometer, we could design a system where executives are paid with base salary plus a bonus that is calculated based on stock performance. Under this system, executives are not allowed to buy/sell/hold any securities of their companies, partners and competitors. Stock performance is not always due to business performance. But then again, should a recession hurt stock price and thus executive pay that does not sound too unreasonable. Executives are rewarded more during boom and they bear more responsibilities for overall economy success or failure. But that is still too complex. Why not tie executive pay directly with key business statistics such as revenue growth or profit margin?

As for hoping public investors to curb the excessive risks taken by executives, the mechanism is weak. First of all, public investors or board of directors probably would have failed to see this MBS mess coming. They would likely have been as pumped up as executives, yet without the level of business expertise executives have. We need to let business making their own decisions and take consequences where they are due, instead of massive bailouts.

However, I agree some of banks are too big to fail, because they provide blood to the economy. I believe the ultimate solution is isolating commercial/consumer banking from investment banking. They way risks by investment activities are not spread into business banking and thus into other sectors of the economy. All we need is a single legislation.