Thursday, October 22, 2009

Executive Pay

How did we collectively let it come about that a small group of powerful men, corporate senior executives, is allowed to set its own pay scales?  These people decide among themselves how much they should be paid, and (subject to the vagaries of the tax code) how the pay should be structured (cash, stock, options, etc.).

It shouldn't surprise us that they've quietly agreed, over the last few decades, to wring every drop of blood they could out of the turnip.  If the corporations they run had done this, for the prices of the goods and services they sell, it would be an antitrust violation; but somehow it's OK if the executives are all on each other's boards (they are) and they all agree on what each other should be paid (they do).

Nobody else in this world is allowed to determine unilaterally how much money he makes.  Not you, not I, not the President of the United States.  Congress comes close, in that they can vote themselves a raise; but they're restrained by outrage among their constituents which could prevent them from being reelected.  Only corporate executives (and mainly American corporate executives, although the practice is starting to spread to Europe) can decide, the value of my job is, oh, $750,000 a year base, but it also deserves annual bonuses of (say) $15 million dollars.

Nobody is "worth" that much money, not even if he (it almost always is he) can spin gold from straw, like Rapunzel.  The practice is sheer, unadulterated greed.  In the middle ages, these men would have been vilified as mortal sinners for their greed.  Now they are "the masters of the universe."  Which is right?

So I'm not weeping that the Treasury Department is cracking down on senior executive pay at the banks that have taken TARP money.  Believe me, you'll never see any of these men standing on a street corner with a cardboard sign reading, "Hungry, please help."


  1. The "wisdom" in corporate America is that an executive is worth what profits and growth he/she can generate. After all, if a company's stock doubles, or its income annually is, let's say, a billion dollars, then it may seem that 20 million dollars a year isn't "too much" to justify.

    The problem is that executive pay has become disconnected from performance. Company executives of many firms make big money even when the company may be performing poorly, or actually failing.

    The popular defense is that in this environment of excessive pay, a company can't "compete" for quality talent in the executive pool without ponying up unreasonably large pay packages.

    It's even begun to occur in colleges and universities, where college presidents can command several hundred thousands of dollars a year, just to make polite speeches and sit in on academic planning committees.

    It's gotten way out of hand. Privately held business and corporations--they can do what they want, assuming they aren't screwing their own employees or actively seeking to screw the country by exporting jobs or sheltering income overseas. But publicly held companies, in which shareholders supposedly have a say in major personnel decisions, or where the government has lent support in the form of TARP money, need to be held to a reasonable standard.

    It seems reasonable to imagine that no executive, no matter how hard they work or how talented they might be, could be worth over a million dollars a year from all sources of remuneration. The same should be true for professional entertainers and sports figures. Unfortunately, we have nothing to say about that. But with the TARP arrangements, these executives--who probably should have been fired, instead of rewarded with bonuses--should get a fraction of what they've been accustomed to.

    That's not socialism. It's common sense.

  2. I have a suspicion that the board of directors get the chief executive to hire a lot of friends and relatives et al., or contract services from companies owned by the directors who in return approve the chief executive's bonus. What incentive would there be for the directors to approve the CEO's bonus, they're not getting any of it?

  3. As I understand it, it's a "you scratch my back, I'll scratch yours" arrangement, instead of direct benefit. Executive A from company A is on the boards of companies B and C; executives from companies B and C are on company A's board also. When company A's board proposes executive A's compensation package, executives B and C vote for it; and vice versa.