The Executive Pay Scandal -- Part 1

So, after a year or so of chin-wagging, rising unemployment, a trillion dollar bailout of the "banks too big to fail," we now have a sure sign of repentance from those very same problem-creators; bonuses even bigger than the ones that broke the bank(ing system) in the first place. You have to love these guys: they are so not getting it, but they certainly have world-class chutzpah.

With a straight face, they are now telling us that hundred-million dollar compensation packages are justified by their performance. After all, if it wasn't for them, their institutions might actually have failed. And though we're not just talking about CEO's, they certainly get the biggest checks, as usual. Why? Because they are held personally responsible for the actions that led to that performance. If they hadn't been there, stockholders, bondholders and everyone putting up the money (that's you, reader) would not have saved their jobs and/or lost their investments. Presumably, we should all be grateful.

But Maybe Not. Let's have a closer look, not just at the payouts but at the rationale underlying them. After all, these salaries and bonuses supposedly adhere to one of the most revered principles in management: people should get paid for their value. Their compensation should reflect their contribution to the organization's performance. If it does well, the people who made it happen do well. How American is that!

Well, let's see. We need to peel the onion a bit to see who or what is actually responsible for an organization's performance, and how much of a bonus seems appropriate. If we assume that the distribution of bonus monies reflects the accepted view, we have to conclude that the CEO was by far the single most important contributor. CEO's, for example, get the biggest slice and compensation drops off very sharply after that. So she is held to be largely responsible for success.

As to the second issue, how much is a very successful CEO worth, their current pay is now about three times larger than it was a decade or so ago. In 2005, CEO's of Fortune 500 companies got total compensation, including bonuses, that was 465 (not a typo) times as much as their average worker. Ten years earlier, that ratio was about 168: ten years before that (1985) the figure was 67. By the way, the ratios for other industrialized countries in 2005 ranged between 22 (Japan) and about 40 (UK) and they have risen much more slowly. It's easy to argue with these specific figures, but by any measure, CEO's in the USA get paid hugely well, and it gets even better from year to year, both in absolute terms and as compared to company performance.

So, as this has become widely recognized, a pay czar has been appointed and given the power to adjust the pay of the top 25 executives in companies that are operating with the help of a federal bailout. What should he do? Does this make sense or might there be a better way? Faithful readers (there are a few) will be certain that I will at least suggest one. They're right. Tune in for Part 2 and see.