Recently a topic in great limelight in the media and minds of average layman is that of executive pay. I thought I will put my two cents on the ongoing mayhem on how much the captains of industry deserve to get compensated.
In spirit of full disclosure I would caveat that I am an ardent fan of free markets. My biases are heavily towards the Anglo Saxon model of capitalism rather than the government directed French model of capitalism. To me executive pay should be more towards the philosophy value of art lies in the eyes of the beholder a.k.a shareholders. However the recent exuberances of chiefs splurged all over the Wall Street journals begs me to look at the other side of the coin. Needless to say that the tax payers money being spent of buying furnishings for offices and on Ceo’s of collapsing institutions leaves one with the feeling that the government is acting reverse that of Robinhood. But does the behavior of few of these spoilt brats give government the right to cap the pays of everyone in the industry to $500,000?
A look at the disclosure of the pay of top 5 employees at the much revered Goldman Sachs reveals that they made north of $300 million in 2007. (check out the link http://www.sec.gov/Archives/edgar/data/886982/000119312508049485/ddef14a.htm#toc53863_24) . For the very same year the revenues for company grew 27% (69b – 87bn) and net income to shareholders 21% (9bn – 11bn). If you take into perspective the value added in their entire time period at the institution the percentage that they take away home is miniscule. Don’t the very best deserve to take home 10% of what value they have created? (a percentage much less than the coveted hedge fund industry). The controversy comes in when institutions not making enough still continue to pay their chiefs in the same manner.
There are several reasons that strongly support the continuance of pay level of executives in the case of short term aberrations from profitability for an institution. Two that I would like to talk to are the risk taking and government sector’s own pay structure. First, while it is good to pay 10% of value in good time, there is a huge case of asymmetry in bad times. Failure is not punished by taking away 10% of one’s income and savings but only by firing and loss of total income. Doesn’t this favor awarding risk taking by the Captains?
Second, keeping the view that institutions are for long term, one shouldn’t get short sighted on the performance in atypical market conditions and down business cycles. Does the pay of government executives depend on whether the country’s budget has balanced or any other performance metric? If that isn’t the case shouldn’t the government sector ponder about reforms in its own salary structure and leave markets to determine pays for market institutions?
This post is dedicated to my friend and avid blogger ibn-e-sina who inspired me to start blogging. I wish him all the luck as he goes forward to be an investment banker in tumultuous markets and may he earn a whole lot for having the courage and tenacity to be a banker!
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