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The Globe and Mail

Moody’s lambastes dealer’s $78-million executive incentive plan

An employee of the Korea Exchange Bank counts money next to stacks of one hundred U.S. dollar banknotes at the bank's headquarters in Seoul, Aug. 11, 2011.


Enrichment of corporate executives through high compensation is one of the big negatives of owning stocks. The hired help try to help themselves to too much of the wealth businesses create.

It isn't often that you'll see a high level denunciation of extreme corporate compensation. But Moody's Investors Service has done just that, over a payday for two executives at Jefferies Group, the mid-sized U.S. investment dealer that is about to merge with Leucadia National Corp.

Moody's analyst Peter Nerby has taken a swipe at the $78-million (U.S.) incentive plan compensation to CEO Richard Handler and Brian Friedman, chairman of the firm's executive committee.

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In Moody's weekly credit outlook, Mr. Nerby called the payment, in the form of restricted stock, a "credit negative" for bond holders and said it "once again highlights the issue of excessive compensation at investment banks."

Mr. Nerby, while praising the performance of Jefferies in avoiding some of the huge losses experienced by bigger rivals, says the size and form of the award to the executives "may jeopardize the board's stated objective of 'motivating employees to perform without exposing the company to serious risk.'"

It's a refreshing take by Moody's. Most shareholders are used to reading self-serving justifications for huge pay packages in annual shareholder circulars, where these types of stock awards are praised as a way of aligning the interests of executives with those of owners.

Another take is that the stock awards may have the opposite effect: encouraging executives to take gambles that harm shareholders who actually use real money to buy their stock.

Mr. Nerby, for one, worries about it. Although the Jefferies stock award is subject to three-year vesting, "history has shown that tail risks can take longer than three years to appear," he noted.

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