Thursday, October 4, 2007
If I were on the Comp Committee...
Chairman of the Board, CEO
Countrywide Financial (CFC)
2006 Total compensation: $43.0 million
The story of Countrywide Financial and its CEO, Angelo Mozilo, illustrates the point I am about to make. Countrywide is a big force in home mortgage lending and over the years, Mr. Mozilo became one of the highest-paid executives in America. In 2006 alone, FORTUNE Magazine reports that he made $43 million. link
Other reports based on public filings indicate that he took home $160 million in 2005 and $120 million in 2006, when factoring in pay, profit on exercised stock options and stock gains.
As everyone knows, Countrywide's stock tanked in late summer as its sub-prime lending woes made the headlines. Thousands of employees lost their jobs and the Company was forced to seek an emergency investment from Bank America to stave off bankruptcy. CFC closed yesterday at $19.88 - way off its 52 week high of $45.26. Leave aside the moral issue of foreclosures and personal bankruptcies for those middle and lower income families who can no longer afford their variable rate mortgages. Let's focus exclusively on this mess as it relates to CEO compensation.
Is it appropriate that a CEO should make tens or hundreds of millions of dollars as he or she leads the Company right into disaster? Even if the board takes action and fires the CEO, employees and shareholders are left to feel the most financial pain in view of the huge sums of money already made by the CEO. This just doesn't seem fair. These CEO's should have more in the game than their pride and ego.
I have a solution. It is called variable value options (VVO for short). Here is how a VVO would work. Options have vesting periods; typically 3-4 years. Options have exercise periods; 5 or 10 years. Why then is the exercise value of an option determined by the price on a single day? Why not have an 18 or 36 month option value period initiated by the option exercise. An option's final value to the executive would be determined by the average price of an option over this extended period.
Under a VVO plan, the CEO would continue to participate in the performance of the Company's stock either way -- if performance gets better, stays the same or gets worse. This doesn't seem unreasonable given that CEO's are charged with building the long term value of the Company and they can make millions doing so.
The easiest way to implement this policy would be to eliminate the right to buy and sell an option immediately upon exercise. Force all executives to hold their shares upon exercise. This would truly align the top management with shareholder interests.