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Feb 4, 2009 - 09:53 PM |
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Executive Pay Scale (TARP-related) - Meandering Thoughts |
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It's about time I moved away from anime in this journal since my blog already does a decent job of that. So with some inspiration taken from a certain anime blogger, I've decided to devote this journal to things I read on the internet (which may include anime) and have a thought or two about. Seeing the sort of vetting that people on here are capable of rendering, I figured it'd be a good way to refine my thinking process. (Let's see how long this'll last.)
So stuff regarding the economy:
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Quote:
“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”
Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits would make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms.
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Source: http://www.nytimes.com/2009/02/05/us...ics/05pay.html
So part of the plan is to rein in executive compensation at firms that receive TARP money. OK, check. It's a good political move and the public was pretty sick of executives getting huge bonuses when their companies were failing. And since the government had to bail them out, it's also understandable that they'd want a hand in the way things were run.
That said, I'm trying to picture Mr. James F. Reda saying that first line with a straight face. Calling a $500,000 limit "draconian" and "not a lot of money" seems to me a statement that's wildly out of touch with reality (granted, the comparison group he's thinking of are CEOs in Fortune 500 companies). For most people, half a million is a windfall and Reda's attitude only underscores the income disparities out there. Is it wrong for me to be disgusted by the way he said that so casually?
He then goes on to talk about the issue of being unable to keep executives if the pay is limited to that amount. While I agree that you need to have the right incentives in place to get people to work optimally (a good solution would be to include stock options as a part of that $500,000 where they have the chance to receive ridiculous amounts of wealth if they succeed in reviving the bank's fortunes, so the theory goes anyhow), I'm not sure how strong a correlation exists between executive compensation and how well a company is doing in general. My professors have told me that no such correlation exists according to some study, but I haven't taken the time to look into this study so let's leave it alone for now and ponder the theoretical pay versus performance.
What I'm curious about are the marginal benefits of executive compensation to the company. Let's say that by increasing the base pay of an executive by $500,000 and add another $500,000 in stock options, the company earns an additional net income amount of $2 million, one can't begrudge the company for doling out that extra amount.
But if we go up the pay ladder, we have to ask ourselves at what point a corresponding increase in executive pay will result in no increase to the company's bottom line. My guess is that that amount will be somewhere around $5-10 million (this amount includes housing and dining stipends, bonuses, stock options, and other benefits) because once you reach that point, an extra million dollars isn't going to coax out much in an increase to the company's net income and the company would be better off using that amount to expand their business further.
Furthermore, there's no guarantee that higher pay leads to better executive performance either and we've seen evidence of this in John Thain (Merrill Lynch), Vikram Pandit (Citi), and Rick Wagoner (GM) whose companies have been flailing around pretty badly. It's not like you'd want to retain people who are incompetent as chief executive anyways. One could argue that things would have been worse had these people not been present, but the flip side of the coin is also true, so that's an argument I'll simply dismiss unless someone can present a compelling scenario.
In the end, I think money can only motivate so much. Most investment bankers, by the time they reach the point where they'd be considered for an executive position, are already damn wealthy and the only real benefit of being a CEO is the prestige that comes with managing such a large company and managing it well. Other than that, it's hard for me to see how pay and benefits would get them to produce more because you either have the skills to manage a company well and allow it to grow or you don't.
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