Cash is no longer king…

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Expert Perspective by Grahall’s OmniMedia Editorial Board

The April 1, 2010 article published on msnbc.com “Executive pay slips for second year in a row: First time back-to-back declines occurred in 20 years; top CEO makes $52M” says: “Top company bosses saw their pay decline further in 2009, the first time in two decades that it has fallen for two consecutive years, according to a new analysis.”

With the ratio of CEO to “average worker” pay still at an astonishing 300 to 1, many might find the concept of a “slip” in pay to be laughable.  Others might argue that it is simply an indication that the stock market hasn’t recovered fully and the executives are still “suffering” from loss in value of their substantial equity positions.  But we prefer to take a more hopeful view on this now 2-year “trend,” and most certainly from a process and transparency point of view, things have changed for the better. 

The article goes on to say that: “…the Obama administration is scrutinizing corporate pay in an attempt to discourage risky business practices… That would mean smaller upfront cash salaries and fewer perks, more compensation in the form of company stock and a longer wait to receive it, according to the Post.”

So once the king, now cash (in the form of compensation) is seen as a menace to prudent business practices.  But is cash compensation really the demon and if so why?  

As far as its recipients are concerned, cash has at least two very big advantages:

1) Unlike equity, cash is not subject to the vagaries of the market. Cash compensation doesn’t naturally benefit from market increases but there is absolute protection on the “downside.” 
2) It is typically paid out “short term”, based on single year results.  Cash compensation paid for results of one year’s decision might fail to recognize longer term positive or negative outcomes of these actions.

But if you really think about it, these are not characteristics of cash but rather the manner in which its use is structured. 

Effectively, there is no reason why cash can’t be subject to clawbacks, held to be paid or not at a later date once the results of actions are better understood, or even subjected to changes based on stock performance.

On the other hand, the now widely touted equity pay alternative (intended to align executives better with shareholders) could be structured to increase risky behavior if receipt and sale of the stock is permitted in the short term.

Contact Grahall’s Editorial Board at edie.kingston@grahall.com

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