The directors of Southern Community Financial (SCMF) have taken an unusual step in their response to the financial crisis by reducing their own pay packages.
Executive compensation should be designed in such a way that directors share in the pain, and not just in the gain.
SCMF is breaking with the status quo in doing that. All kinds of financial companies have gone ahead with huge compensation packages for their brass, even as their share prices cratered. While this is a story with a certain populist appeal, shareholders are the real losers. Compensation systems don't work and there is little that can be done as long as boards maintain their current practices for nominating and electing.
I am going to contrast the decisions by SCMF, a small bank from Southeastern North Carolina, with AIG. AIG is