Executive remuneration

An interesting debate has kicked off on executive remuneration in Economists View

It is not yet clear how Obamas proposals on executive remuneration will pan out. It may include a $500,000 cap on salaries for financial institutions receiving aid – subject to a reporting mechanism (how the money is being spent), a requirement that government money stimulate new lending, limitations on severance payment etc..

This proposal has been criticised as a dangerous intrusion into corporate boards authority they would make it more difficult for financial firms to fill executive positions.

On the other hand, the argument for tightening further the guidelines is that it would leave the corporation with unlimited amounts in non-salaries pay (such as bonuses that can be cashed out after the government is paid back). One suggestion is that executives should be preluded from unloading restricted shares for a period of three years after they vest.

But there is a bigger debate on. Why limit it to exceptional assistance cases?

The arguments of Robert Reich and Uwe Reinhardt are very pertinent. They ask three questions.

Why is it necessary to subscribe to the Long Ranger theory of management that a firms chief executive is the main determinant of a firms market capitalisation?
Is the supply of talented executives strictly limited?
Why not gear remuneration to long run performance e.g. impose a 50% tax rate on all remuneration that is not based on suitable performance-based structures?

I sat on a Board many long years ago (in the early 90s) and I saw how the process worked. An assessment panel is first set up to seek impartial advice from a firm of pay consultants. They are then told that if they want to get the best executive, they need to at least equal the record amount. They simply accept the Lone Ranger theory and view that executives are limited without being subject to shareholder disciplines (as the Board controls the outcome).

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observa
observa
12 years ago
NPOV
NPOV
12 years ago

Trujillo: “The US economy didn’t have problems until the government got involved”

Can anyone provide any sensible definition of the words “economy”, “problem”, “government” and “involved” for which that statement would bear any resemblance to reality?

observa
observa
12 years ago

Yeah his mind must have been wandering back to the Boston Tea Party for a moment there NPOV

Still he got this poignant dig in-
“There seems to be an over-dependence on government – what’s Canberra thinking, what’s Canberra going to do, it’s Canberra, Canberra, Canberra.”

To the breaking news that Optus CEO Paul O’Sullivan was bulk sucking up to Canberra about the imperative for their NBN despite the GFC-

“This is probably the pre-eminent nation building project,” he told journalists.

“It not only employs a large number of Australians, but it provides us with 21st century capability in terms of technology which will feed through into productivity and future benefits.

“There’s probably no better project for achieving the Rudd government’s (economic stimulus) aims.

“So I would have thought the chances of an NBN have, if anything, been enhanced by what’s happened in the economy.”

Obviously we all need more internet bandwidth to keep closer track of our disappearing assets.

Patrick
Patrick(@patrick)
12 years ago

Pertinent???

The answer to the last one in Australia is that we are only 3.5% short!

In fact financial firm executives are already suffering massive pay cuts – it is not the executives who are the highest paid though.

NPOV
NPOV
12 years ago

3.5% of a multi-million-dollar salary is still a lot of money – more than enough that encourage changes in behaviour, one would think.

Patrick
Patrick(@patrick)
12 years ago

what, moving to Singapore?

NPOV
NPOV
12 years ago

I don’t believe for a moment that the world is at all short of talented executives who would value living in Australia in preference to Singapore over having an $50K a year in their pockets.
Would you move to Singapore for that much?

pedro
pedro
12 years ago

I we are going to link executive pay to handouts it should be done across the board. Hello holden and ford!

This issues always seems to me to smack of the same motivations as sumptuary laws.

Patrick
Patrick(@patrick)
12 years ago

No NPOV I actually disagree fundamentally. I doubt 3.5% will achieve anything more than higher executive salaries.

Pedro, I agree totally. GMH Board should be sacked if they get any government money.

observa
observa
12 years ago

I see they’re starting to say ‘profoundly’ sorry-
http://www.news.com.au/adelaidenow/story/0,22606,25038870-5006368,00.html

Tel_
Tel_
12 years ago

First rule of engineering:

Build an idiot-proof system and a better grade of idiot will come along to demonstrate how to outsmart your system.

Applying this to the problem at hand:

In a nutshell, the more government tries to take over the thinking that rightfully should be done by shareholders, the more shareholders will abdicate responsibility. I’m all for regulations regarding transparency and publication of useful information, but ultimately the shareholders are the owners of the company, they were the ones who put their money into it and they are the ones who have to make the decision.

Think about what it means in practice for government to be making the decisions that rightfully would be shareholder’s decisions. Some bureaucrat, with no industrial or business experience, will be sitting in an office and 100% of the time make the decision that has the lowest risk for their career prospects, and this will be the decision that shows as little initiative as humanly possible under the circumstances. If the govt do try hiring people out of the industrial and business circles then what they will get are the people who couldn’t make it in those circles and see their government desk as a safe retirement strategy (with the truly valuable people, business won’t let the go). Business will see government as a convenient service to help them offload their dead wood with the least heartache.

NPOV
NPOV
12 years ago

Well you take it up with Nick Patrick – it was his suggestion. And note that the “easy” way to avoid paying the extra tax is to pass certain performance tests.

Does your proposal that raising taxes will raise executive incomes have any empirical evidence behind it? Because I would’ve thought a fair bit of evidence exists suggesting the opposite – in times and places where tax rates for top-end incomes are higher, the ratio between CEO and worker salaries (even pre-tax) was/is typically somewhat lower.

NPOV
NPOV
12 years ago

Tel, nobody’s suggested that the government decide on executive salaries, only to cap them for companies accepting emergency taxpayer assistance.
In general I agree the shareholders should have the ultimate say in such salaries, and I don’t have a good answer as to why they have regularly agreed to salaries/bonuses that seem to bear no relation to any actual performance. I’m actually curious how this process works – what decisions actually go to the vote, and is it essentially one vote per share? In which case, it’s not to imagine that proposals to raise executive salaries or pay bonuses are popular among the bigger shareholders who have the most voting power, because a fair number of them either a) are top executives themselves that will benefit directly b) are mid-level executives with a view towards reaching the “top executive” level in the near future.

Tel_
Tel_
12 years ago

NPOV, you miss my main point. Shareholders should be losing money to these leeches. Shareholders should be bled dry until it occurs to them that something is wrong. That is the only way to make progress.

It kind of bothers me the number of people who are dreaming of a pain-free financial world. Don’t bother dreaming, the pain-free world already exists. We call it “morphine” which I’m told is extremely effective, and can even be useful as a survival tool when used with great discretion. Sadly, we also know that living in a pain-free world is so attractive that such tools are regularly used without due care or caution and rapidly become a dangerous hindrance to survival of both the individual and the group. Although I’m not a supporter of drug prohibition, I do believe that such technology should be handled with serious respect, not unlike the handling of explosives, live electrical circuits, nuclear material and economic bailouts.

NPOV
NPOV
12 years ago

Tel, perhaps, but I think you place more faith the ability of shareholders to learn from past mistakes than would seem justified by the evidence available.

As for dreaming of a pain-free financial world – I certainly see no reason not to hope for a world where your average citizen can live an existence free of severe financial pain, and not be made to safer unduly due to factors outside their control. For those who enjoy the adrenaline rush and the rewards of high-risk behaviour, there will always be pain, but I’d suggest most of us are happy just to know that our financial position is comfortable and secure with the promise of improvement in the future. The current system still seems to me to inflict much of the pain on those who haven’t taken big risks and haven’t had much in the way of rewards.