Tuesday, September 23, 2008

Problems with Free Market Compensation

WSJ's article Big Pay for Big Bosses Under Fire describes some of the current issues around executive compensation, but it leaves out numbers. Here is a short list of the 2007 compensation totals for the CEOs of some major companies that have been in major distress recently.

Lehman Brothers: $22 Million
Fannie Mae: $12 Million
Freddie Mac: $19.8 Million
Bear Stearns: 28.4 Million in 2006
AIG: $13.9 Million

The head guy from AIG has done something remarkable: He is refusing an eight-figure payout he was guaranteed in his contract.

Check out the New York Times article The Bottom Line for Those at the Top for a nice interactive graphic that allows you to contrast how companies have performed with their CEOs' compensation.

My general problem with executive pay is that it is determined by executive boards that are far from impartial. When Gruto's Ice Cream shop thrives, it's because thousands of people in the greater Percellville Metro Area decide with their money that Gruto provides good value. When Wegman's thrives, it's because thousands of people decide that they provide good value and services for groceries. When a corporate CEO makes $15 Million in a year, it's because a group of a dozen or so people have decided that they can spend a ton of stockholders' money for a CEO.

It's the same with professional athletes in team sports. Having an athlete make tens of millions of dollars a year is crazy, but I don't have a big problem with it until I see someone make that money without performing. If a player makes most of his money in incentives, then I feel much better about it. When a player makes crazy money and is a complete flop, something is wrong with the world. I feel the same way when a CEO makes crazy money while the company goes down the tubes.

Anyway, John McCain has said that any company getting a bailout from the feds should pay their CEO the same salary we pay the President of the US. As long as the CEO gets a free mansion to live in that is walkable to his office as well as free food and travel, I'm fine with something like this. More reasonably, I'd say that a limit of two or three times the President's salary seems reasonable.

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