Executive Pay

I have been arguing in this column that Executive pay has no correlation with the real risks taken. And measured against the real life or death decisions made by doctors, service men, captains of ships both air and nautical – CEO’s pay vis a vis their performance seems to be great outliers – almost ridiculous in the extreme . Tim Harford in his book The Logic of Life argues its the infernal tendency for tournament rewards that  is to blame.

An article by Nicholas Kristoff caught my attention in these market strained times. I borrow some of the best lines here:
‘But one of our broad national problems is rising inequality, and it is exacerbated by corporate executives helping themselves to shareholders€™ cash. Three decades ago, C.E.O.€™s typically earned 30 to 40 times the income of ordinary workers. Last year, C.E.O.€™s of large public companies averaged 344 times the average pay of workers

A central flaw of governance is that boards of directors frequently are ornamental and provide negligible oversight.As Warren Buffett has said, €œin judging whether corporate America is serious about reforming itself, C.E.O. pay remains the acid test.€ It€™s a test that corporate America is failing.

These Brobdingnagian paychecks are partly the result of taxpayer subsidies. A study released a few weeks ago by the Institute for Policy Studies in Washington found five major elements in the tax code that encourage overpaying executives. These cost taxpayers more than $20 billion a year. That€™s enough money to deworm every child in the world, cut maternal mortality around the globe by two-thirds and also provide iodized salt to prevent tens of millions of children from suffering mild retardation or worse. Alternatively, it could pay for health care for most uninsured children in America.

Do we truly believe that C.E.O.€™s like Mr. Fuld are more deserving of tax dollars than sick children?

Perhaps it€™s understandable that C.E.O.€™s are paid heroically when they succeed, but why pay prodigious sums when they fail? E. Stanley O€™Neal, the former chief of Merrill Lynch, retired last year after driving the firm over a cliff, and he walked away with $161 million. The problem isn€™t precisely paychecks that are huge. Baseball stars, investment bankers and hedge fund managers all earn obscene sums, but honestly [we beg to differ on the last two who  have been and are right now indulging in Federal Moral Hazard insurance or pickings while at the same refusing to participate in any capital market stabilizations at great risk to the whole financial system. They are known in Economic circles as freeloaders and shirkers] €” through arm€™s-length transactions. You and I may gasp, but that€™s the free market at work.

In contrast, boards pay C.E.O.€™s after negotiations that are often more like pillow talk. Relationships are incestuous, and compensation consultants provide only a thin veneer of respectability by finding some €œpeer group€ of companies so moribund that anybody shines in comparison. The result is what critics call the Lake Wobegon effect, which miraculously leaves all C.E.O.€™s above average. Indeed, one study of 1,500 companies found that two-thirds claimed to be outperforming their peer groups. John Kenneth Galbraith, the great economist, once explained: €œThe salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.€

There are widely discussed technical solutions to C.E.O.€™s overpaying themselves that we should move toward. We can also learn from Britain and Australia, which offer shareholders more rights than in America, redrawing the balance between shareholders and management and curbing pay in the process.’

With the one noted exception – I say Amen.

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