This weblog has devoted space more than once to the sometimes ridiculous executive pay policies pursued by many Wall Street firms, notably including AIG and Merrill Lynch. I felt then and continue to feel now that many financial firms couldn't spell "pay for performance" and were unable to get past the "pay" part. Top Performer was defined as someone who had once made the firm a lot of money, and who could not be allowed to join the competition, regardless of their current performance. That definition seemed to dictate that they become millionaires many times over every year, even if their risk-taking endangered the very existence of the firm that employed them. My gripes applied equally to deal makers and their CEOs.

But there are two sides to that story, and this is the other side that you don't often get from the media. Except perhaps by accident…

The Los Angeles Times today reported that Goldman Sachs CEO Lloyd Blankfein spoke in favor of more restraint in executive pay, perhaps in part to short cut more severe government intervention but perhaps because he gets it (finally). One of the things he said that makes a lot of sense to this writer, besides paying well for a good job and clawing back bonuses for a bad job, is that most executive pay should be in stock that aligns long term goals of executives and stockholders.

In fact, most of those huge pay numbers for CEOs are in fact paid in stock or stock options today. When the media quotes multi-million dollar pay packages for CEOs they don't tell you that a lion's share of that number is the valuation of restricted stock grants or stock options that will take years to be converted into cash, during which time their value could change dramatically. As an example, the Times article quotes Mr. Blankfein's pay for 2008 as $43 million, including only $836,000 in cash and the balance in stock and options. They then note that the stock, presumably counted as $42.2 million when awarded, is worth about $14.6 million today, as a result of stock price declines.

Now I don't mean to say the man is poorly paid at $15 million or so, but it's a far cry from $43 million, and he did in fact pay a price for the performance of his firm last year. Yes, maybe he should have had to repay his salary too, but that gets down to the real value that should be placed on effort, and we don't have enough space to tackle that one here. Just keep this in mind as you read the headlines:

Executive pay is invariably composed of cash and stock. The stock or stock options part has an at-risk value until the executive can sell the shares, typically some years after the award. In the interim, all he or she got was a promise of payment, a promise that the market sometimes retracts. And when the market price of the stock reflects the success of the company itself, that is "pay for performance" in its finest form. Your CFO for Rent says "Let's have more of that."

As always, I welcome your comments.