Executive Pay
10 November 2008Whether you call it a bailout or a rescue or an early Christmas present, our government is giving a huge amount of cash to financial institutions. These financial institutions which have proven time and time again that they can’t be responsible with money. (I particularly like the AIG group that went on a $400,000 junket right after getting the bailout money.)
Part of the language of the bailout is over executive compensation. However, it’s hollow language. It says something like “executive compensation shall not be excessive” or something like that. I imagine my definition of excessive is different from yours and is certainly different from an executive’s definition.
The language should have read something like “the CEO’s total compensation shall not exceed 10-times the total compensation of the lowest-paid person in the company, including contractors.” Make the language concrete, measurable, and fixed. Lowest-paid person gets $30,000 a year, CEO can get $300,000 a year. CEO wants more, fine, raise the salary of that secretary. CEO wants a bonus, fine, give 10% of that bonus to the lowest-paid person.
JP Morgan wasn’t a real nice guy, but this is a formula he came up with. He thought it absurd if the head of a company got more than 10x that of the lowest-paid person. It may have been 12x, but 10x is so much easier to work with. A lot of companies in Japan work on the same idea.
Yet you see here companies that are losing money giving their executives huge pay packages and bonuses. In companies where I’ve gotten a bonus, if the company doesn’t perform, no bonus. Seems fair.
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