CEO, Gold Miner, and Quarterback Compensation

CEO, Gold Miner, and Quarterback Compensation

February 4, 2007

I got some great comments from readers about the CEO compensation piece I wrote on Friday, including one challenging my claim that public boards aren’t worth a damn, one comparing CEO’s and other star players in sprts and Hollywood, one asking how to keep the good CEO’s if you take away the stock option free-ride, and one from a wonderful young man who just got his first Wall Street job. You can read them by clicking on the comments button under the Forbes on Fox story.

Which brings me to coal miners.

OK, I’ll admit it–I read a lot of weird stuff. I have a fire-hose of journal abstracts, dissertation topics, and newspapers from all over the world landing in my inbox every day so I can see what other people are working on. Imagine how exciting it was this morning when volume 22 of, Research in Law and Economics showed up on my desktop.

I know what you are thinking. “JR, you are so lucky! please tell me how I can get in on this fascinating subject. Please answer soon because I can hardly wait for my first issue.”

All you have to do is sign up as a Guest user at ScienceDirect. It’s free. Once you have signed up you can graze through a list of at least a gazillion professional research journal titles (Actually, only 2692) and check off the ones you want to track. ScienceDirect will then send you an email evey time htey release a new issue with a table of contents and abstracts for all the articles. If you want to buy an article they will sell them to you ala carte, but you can graze the abstracts for free. It’s like eating at a dim sum restaurant of nerdly ideas.

Back to the coal miners. This issue contains an interesting article called Lays vs. Wages: Contracting in the Klondike Gold Rush. Mine owners during the gold rush had two different types of compensation arrangements with the miners they hired to work their claims, ordinary wage contracts and lay contracts which gave the miners a share of the takings. The author analyzes the conditions–the risk of working in extreme weather conditions–that typically led to lay contracts.

That concept–pay for work but upside interest for taking risk and bulding the vallue of a business–makes sense for executive compensation discussions today. If someone wants a piece of the upside they need to have some skin in the game. I think that’s why leveraged buyoouts–where the managers frequently pony up their life savings to invest in the company–have a better track record than public company stock options.

But why stop there? I have always thought that franchise players–the Magic Johnson’s and Michael Jordan’s–that can impact a sports team’s value should structure contracts where equity is a big piece of the package. Same for TV, movies, music, and ordinary businesses.

Let me know what you think.

JR

John Rutledge

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