Saturday, February 14, 2009

Speculation, Investment and Capital Gains

I just fired off an email to Rakesh Khurana! Oh, you did, too? I guess we were both struck by the clarity and insight he gave to the issue of corporate compensation during his interview with Scott Simon on Weekend Edition.

If you missed it, Scott Simon led off the piece with the revelation that over 700 Merrill Lynch suits stuffed over a million bucks into their Prada wallets last year while their company's red ink was running like bull's blood in the gutters of Wall Street.

OK, even if they had taken a pass on the payout, their beloved Bull would have ended the year as a patty on a bun. But sometimes you have to do something just to say you did something and taking a check with all those zeroes just stinks like a honeywagon.

Anyway, Professor (Harvard B-school) Khurana accused Wall Street firms of being a kind of ATM for executives and proposed a shift from the Wall Street "I'm a financial A-rod and I should get paid like him" mentality to one in which the Bergdorf Goodman crowd are willing to forgo quarterly profits and huge rewards in favor of the long-term health of the company. To continue the baseball analogy, an exec. should be willing to take an out if it advances the runner.

But there's no reward in that. In the same way that baseball Knights of the Realm James and Beane re-examned the conventional wisdom of player values, the same analysis needs to take place on The Street.

I have a modest proposal. Call me crazy (I have heard a lot worse) but I will bet you a cold one that this might work.

Take the capital gains tax (yes, the one that inexplicably 20% lower than the income tax rate) and put it on a sliding scale to reward longer holding period. Keep a stock for five years and the IRS leaves a mint on your pillow in April. Hold onto it for ten years and Uncle Sam gives you a big, sloppy one. But flip that stock after a quick gain and the he wears a leather suit and goes medieval on your ass.

In an era when the average stock is owned for less than ten months, a change in the tax code could encourage long term investment and discourage speculation. This, in turn, should encourage the CEOs of publicly traded firms to take the long view rather than panic when quarterly profits are down. Maybe then we will have a corporate pay profile that resembles Honda and Toyota where the top executive still have yet to crack a million dollars. Compare to this side of the Pacific where Home Depot's Bob Nardelli forgot to measure twice and cut once and the board still said, "Nice job! Here's $210...and don't let the door hit you in the ass!"

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