Bear Stearns' Expensive Executive Comp Lessons

In my last post, I suggested that sounding like an executive compensation consultant was not among my favorite pastimes. Not that there's anything wrong with comp consultants.

I've enjoyed working with, and citing in print, talented, balanced, clear-eyed comp consultants. I've walked away from some conversations with them thinking, "He's absolutely right: that CEO's $27 million pay this year was a bargain." Such walk-away thoughts are often an affront to my common sense -- usually because I start the debate thinking, "How can anyone, save Derek Jeter, be worth $27 million per year?"

But common sense often leaves the building, particularly in the news articles and, especially, in online content and blogs. Take it from a compensation consulting firm whose counsel I trust.

This two-pager from DolmatConnell & Partners reflects on the collapse of Bear Stearns and its impact on future executive compensation design. One of the essay's key points is an eye-opener: "The Bear Stearns compensation program appears to have been designed appropriately and responsibly, incorporating many best practices." That's not a statement I've seen in any news coverage.

The rest of the piece presents a balanced breakdown of the numbers. The top five executives made a boatload of dough in the past three years -- not that much less than what the company was sold for, in fact. The shareholders took a painful hit. And employees held nearly one-third of the company's shares.

The essay's common sense comes on strong at the end, when it addresses what compensation committees, CEOs, and heads of HR (and, I would add, comp consultants) should do in the wake of the painful insights Bear Stearns' collapse has yielded.

The firm outlines three steps toward better executive compensation plan designing, the most interesting and refreshing of which is a call to use "scenario-based tally sheets." This process would examine a wide range of potential payouts in a plan based on different corporate performance outcomes. Doing so would help limit surprises, even when corporate performance is extremely good or extremely bad (like when the corporation fails to win the World Series).