Executive Pay in a Time of Economic Crisis

Posted by Dan / on 09/30/2008 / 3 Comments

I know I will be viewed as a heretic by many compensation consultants, but I can not remain silent on the issue of limiting, capping or otherwise controlling executive compensation for those companies that end up directly benefiting from the massive and unprecedented bailout proposal.

I keep hearing things like: "Companies won't be able to get the best minds and talent without having an unlimited ability to offer compensation".  I have thought long and hard about it and believe that controlling pay by linking it to success is such a bad idea.  The "best minds and talent" should only be defined AFTER they have proven themselves successful.  Simply categorizing someone as great or brilliant and paying them without required performance is irresponsible in this circumstance.

Many of the people being identified as the financial system saviours are the exact same people who were in charge while the walls collapsed around them.  I do not believe that this qualifies them for pay without performance.  I also believe that these people are driven, passionate and confident and will work to acheive the goals laid out for them.  Some will fail.  Some will earn more than they should.  None will (or should) earn for failure.

My position contradicts much of what I have read from executive compensation consultants around the country.  Of course, demanding performance in return for fair compensation has its risks.  The best and the brightest may choose to test the waters in other industries or locations.  Companies may significantly out perform expectations and people may get paid far too much.  The entire bailout may fail and executives may jump ship mid-stream if they see know upside to continue paddling.  Even with these risks, I believe that my taxes (and yours) should only be used to pay those who have done the job required.

This is an extraorindary time and it requires extraordinary solutions.  I would like to hear what you have to say about this issue and what solutions you might provide to the government and industry if asked.

 

Best Regards,

Dan Walter

 

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Comments

  • Nigel says:

    Most of my client base are in the investment banking / alternative investment space. No doubt the leaders of these firms are the best and the brightest. By definition, focus is on strategy and implementation of that strategy. It seems to me that, apart from in the extreme cases (reckless sub-prime lending backed by an asset class that has a history of "bubble") the failure was not so much in the strategy or its implementation, but in its execution from the desks. The problem with this is that the desk is driven by incentive, which can encourage risk-taking. In my experience, controllers would not take long to determine who the excessive risk-takers are, but have too small a role in the process of individual performance. If Risk Management played a greater role in HR and the performance evaluation process, instead of being suppressed by business heads anxious to retain the rainmakers, there would be less incentive to take excessive risk.

    Firms with a partnership culture have not had the same problems

    October 1, 2008 at 12:46 AM | Permalink

  • Shawn says:

    I believe that the folks who can turn these companies around will do so -- regardless of incentives (if any) offered. The personal capital gained through success in these times will be worth more than a financial payout in the future. (tempered altruism?)

    December 11, 2008 at 12:42 PM | Permalink

  • Sean says:

    I read a NYT's article detailing the pressures on a Top Executives salary. Except for the charity involved I feel that if we are all hurting they should feel some of it as well. I agree that 500k (cash) isn't alot for these people. However, If these people were as smart as they were being paid to be they should have squirrled away the income for the dry season.
    The one thing I disagree with on the second post about the risk taking at the "desks". While I agree with the position that that's where the risk taking went these people were hired because their risks paid off in the past and they were hired in the hopes that they would continue that way in the future. I think the biggest issue is that everyone was looking for the big gain fast instead of the smaller slower "sustainable" gains. I guess that's the problem when a brokerage turns into a bank. To me a bank should be the stable investment performer and the brokerage should be the big market maker, maybe they shouldn't mix.

    February 13, 2009 at 7:44 AM | Permalink

 

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