Although many will express a negative opinion about anyone earning a base salary of $1 million, Ameritrade's CEO has just been given a new pay deal that comes as close as any I've seen to the pure model that should emerge for executive pay. The referenced news story gets some of the facts wrong (surprise!) but I always check the source document to find out the correct information as opposed to relying on the journalist's version.
The $1 million amount was institutionalized by Congress back in 1993 when they introduced the "million dollar cap" through Section 162(m) of the tax code, making any pay above that amount a non-deductible business expense for the company unless it is "performance-based." That now seems to be, for larger companies, the CEO minimum wage. (By the way - thanks to Congress for their continued assistance with compensation design matters. Some research shows that the real effect of the million dollar cap was for companies to quickly escalate salaries to that level that may not have otherwise been, plus deterring companies from implementing performance-based plans due to the complexity of the rules.)
Mr. Moglia will get a base salary of $1 million plus an annual incentive opportunity of $9 million, one-third of which is payable in cash and the other two-thirds in stock. The press release does not indicate whether there are any holding requirements on those shares. The balance of Mr. Moglia's pay will come entirely from payment in Ameritrade shares (not stock options) that will only occur if the company meets certain performance hurdles over a 3-year period. Ameritrade should be filing details of this within the next few days in an 8-K and these details should be revealed. If the annual and 3-year goals are structured properly Mr. Moglia's pay will be directly and linearly related to share value and is then in essence a commission plan, just like when a sales rep is paid a percentage of sales. Let's hope Ameritrade was not led
astray by some of the recent missteps in pay design such as Coke's new plan for directors (note I've linked to a blog by a prominent colleague who came up with a very similar title for his piece on this, albeit 6
days after mine).
Companies should take this concept one step further and provide a $1 million or $2 million signing bonus to cover the first couple of years' living expenses, no base salary, no annual bonus unless it is paid 100%
in shares that must be held for at least 3 years, and the balance in performance shares. But I said that in a Los Angeles Times editorial back in 1990 and that hasn't seemed to sway too many people thus far. None in fact, but we're getting closer.
Tomorrow I'm off to the Annual Conference of the Global Equity Organization in NYC and will be posting from there. Companies in Europe are far ahead of the US in their use of these performance-based plans so
I'll share (excuse the pun) what I learn.
