The possible $2 billion hedge transaction loss by Chase will trigger increased scrutiny of large banks, and derivative/hedging regulation in the U.S.. What it is unlikely to trigger is executive compensation reform at large public companies. The human resource mantra has been to tie executive compensation to the financial results of the corporation over a number of years through a variety of stock options, stock appreciation rights and other deferred equity incentive based compensation. For the most senior executives, base salary, while exceeding $1 million a year, is relatively small in relation to potential incentive based compensation.
Chase will have its Annual Meeting on Tuesday, May 15, 2012. Its Definitive Proxy Statement (Schedule 14A) as filed on April 4, 2012 with the SEC evidences that Mr. Dimon and Chase’s Chief Investment Officer, Ina Drew, could for 2011 respectively receive total compensation of $23,105,415 and $15,509,866, with base salary being $1,416,667 and $729,167. Stock option and other option awards account for the bulk of their total annual compensation at that time. The problem with these awards for large public corporations is not in the tying of compensation of executive compensation to varied measures of corporate results, it is the magnitude of the award given the size of these corporations.
I think it fair to say that Messrs. Dimon and Drew have the skill sets and contacts that would reasonably require a salary greater than $1 million. What the $2 billion potential loss demonstrates is that rarely are the decisions/lapses of a senior executive singly responsible for corporate results, be they positive or negative. Harry Truman was famous for articulating Presidential accountability by making it known that the buck stopped with him. It is as much fiction in politics as it is in business. It is one thing to take responsibility, it is quite another to attribute results singularly to any executive in a large organization. Every executive relies on internal and external advisors in making a decision and in oversight. There are clearly differences in degree and complexity between a large and smaller public corporation, but the issues are reasonably similar. There is no need to alter compensation due indirectly to size, but this is in fact the present result. Chase is not unreasonable in its compensation policy compared to other large public companies, so I don’t mean to pick on it. It continues to recommend approval of advisory resolutions on executive compensation, when other public companies have resisted this minimal effort at shareholder democracy. However, like other public companies, it does compensate its managers more than is reasonably necessary.
When you break down total compensation on an hourly basis it is apparent how unrealistic and unnecessary this executive compensation is. If senior executives had to produce time sheets indicating the work that they did on a 5 minute basis, it would be clear that they did not contribute the equivalent of their hourly compensation on a present value basis. Any executive who is paid $1 million presumably should be desire to have his employer be and remain profitable over the long term. If not, they should be fired.
There is no need for equity based incentive compensation, nor other excessive deferred compensation. If annual salary was capped at $5 million, it should suffice for all executives, without any such other compensation. Their employees and a good portion of their shareholders make due with much less. It would reduce some HR costs as well and might align executives a little bit more with their workers. It will also reduce the accolades and blame attached to executives for results that they alone are not responsible for.
The argument against this is that you will not get the best talent and that US corporations will continue to re-domesticate/relist in more friendly jurisdictions, as they have for tax. The former is a weak argument, because if these executives were really so talented they would form their own business and take the chance that they might be paid what they believe they are worth, working as a consultant. There also are talented workers who would be able to replace them. The issue of re-domestication/relisting is a more difficult issue as it is for tax and securities regulation.
Obviously, shareholders cannot impose this because they do not have the present power to actually decide compensation, they only can sell their shares. If all the alternatives have the same approach toward executive compensation there is little likelihood of this for this reason alone.
I have no doubt that if Mr. Dimon really had direct oversight of this hedging position(s) it would have been stopped. The underlying exposure being hedged would also likely not have become oversized. He would have done this even if his total compensation package was $5 million, because I suspect he, like other senior executives, expect good results. They are already well paid, so in many respects the oversized compensation lavished upon them is mere scorekeeping.
It would be better for all concerned to Occupy HR, rather then to Occupy Wall Street. Mr. Dimon is far from the only Main Street or Wall Street executive in this rough.