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Monday
Sep212009

The problem with executive pay is not the size but how they earn it.

The ongoing political furor about gigantic executive pay packages is largely misdirected at mechanisms for capping compensation. I have pointed out here and here that much of this has been abusive rent-skimming from captured institutions and manipulated markets. However, I see these as only shareholder rights issues because the macroeconomic impacts seem tiny. For example, ousted GM CEO Rick Wagoner's total compensation of $14.9 million in 2008 was 0.01% of COGS ($2 for a $20,000 vehicle), and Jeff Immelt's compensation equaled $48 for each of GE's 323,000 worldwide employees (2.4 cents per hour).

Even the astronomical paydays in the financial economy have little impact on the real economy until a big bust occurs. I doubt the pay practices on Wall Street have changed much since the investment banks went public about 10 years ago, but they may have started taking bigger risks when they stopped playing with their own money. The problem for us ordinary folk is not that they got paid so much but that their compensation contracts incentivized them to take grossly imprudent risks and were generally focused on very short-term revenue or income metrics.

This Working Knowledge article quotes liberally from three HBS professors and makes lots of sense about solutions as well as providing a good background. The background includes counterproductive changes in the law the last time we got exercised about excessive executive pay. Let's do something effective this time and not just enact a sop to populist rage.

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Reader Comments (1)

Roger, I don't think that this deals with the real problem. Take, for instance my brother's rage about the pay of the American Airlines execs. He's a pilot and he is earning, effectively, the same wages he was in '73. He is furious that they have negotiated down the pay increases for unions, and asked pilots and others to take cuts while lining their own pockets. I'll bet that the situation is the same in much of the rest of the working world. This is a matter of basic unfairness. Why are worker wages stagnant, while the boys at the top are raking in big bucks? All wages are not equally stagnant, and you would have a hard time convincing me and almost anyone else that there is higher productivity among the failed industry execs who are asking for taxpayer money...etc.

The issue isn't how much the pay at the top is, the point is that it is outrageously, offensively excessive in light of what the same scum are doing to their own workers, and that includes the massive Wall Street layoffs. There is a further problem for democracy, and national work ethics and morale when the rest of the country struggling to get along sees the failures at the top setting themselves apart as a privileged class of walled monied interests that are bad for almost everyone else in one way or another. These are very real problems. Not the $2 per car that those salaries cost.

September 22, 2009 | Unregistered CommenterChristine

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