Defending Executive Bonuses, Sort Of


Guest Blogger: Don Sears

A little peeved that TARP money helped fund executive bonuses in 2008? Some professors in Pennsylvania see it differently.

Wharton School of Business-- Harvard's main business-school rival-- has some professors who are examining executive compensation issues in the age of government intervention. But calling this article a defense of bloated compensation (it's entitled "Outrage over Outsized Executive Compensation: Who Should Fix It and How?") isn't exactly on the money.

Accounting professor Dr. Wayne Guay reacted to the statement from Treasury Secretary Geithner on the possibility of extending $500K tax deduction caps on all U.S. companies:

Guay said further curbs on compensation might be justified if proponents can prove that high pay packages contributed to the current economic crisis. Given the global nature of the economic meltdown, however, he suggested that the cause of the collapse was not supersized U.S. executive compensation. "We don't have a massive corporate governance breakdown in terms of ... executive compensation." At the same time, "there are a lot of public relations issues floating around. Many companies have come forward needing assistance, and they can't afford to be giving the public a feeling that they're being excessive in any way, shape or form."

That seems to miss the point to me. The stock prices, lack of earnings and poor performance should be reminder enough that TARP companies are TARP companies for a damn good reason: They screwed up and few trust them right now.

The most out of touch argument comes from finance professor Dr. Alex Edmans when he suggests that "the public accepts outsized salaries in sports and entertainment; why not business, he asks."

If the Texas Rangers, New York Yankees or anyone else want to pay A-Rod obscene amounts of money to play baseball, take 'roids, and date Madonna, then go ahead. But not when it's our tax money and not when a company has failed to live up to its end of corporate governance.

The issue framed here, I think, is executive accountability, not direct linkage of the entire global collapse to job performance. Yes, bonuses are a great motivator when the company performs well, but when it doesn't, they probably should deflate and dissipate.

Disconnect? Other professors in the article attempt to explain the disconnects between executive compensation and, well, reality, now. Management professor Peter Cappelli explains:

During the past decade... CEO compensation has been going up at twice the rate of overall pay... CEOs and other top executives see these historically high rates as the new normal. When the economic environment is good, it is easy to pass along pay increases. When the tide reverses, however, it is painful to go back, and executives resist any push to return to prior levels.

Another reason executives are perceived by the public as out of step with reality is that they base their own expectations about compensation selectively... Executives look at what other senior managers are making and choose to see only those who are paid higher. As each package is negotiated, pay across the corporate landscape inflates even more. "It's easy to choose self-serving comparisons, and then it is off to the races with what is essentially bad governance."

Makes sense, or rather, it did. But it's time to face the crowd: We all want pay for performance, but when it is accountable and worthy. Getting executives to act like shareholders was supposed to be one way of balancing accountability.

But does that work? As Prof. Capelli later points out, U.S. execs are too bullish on quarterly performance: "Compared to the rest of the world, U.S. companies are obsessed ....They are willing to twist themselves into knots to manage short-term performance. So it's not as simple as just saying we should get them to act like shareholders."

Great point. Longer term incentives with shareholder caveats may be in order.