Is Executive Compensation Excessive or Appropriate?
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An idea floated around just after the inauguration by the Obama administration was an executive compensation cap. These executive compensation pay limits did not resonate with a capitalist view on executive compensation and made many free-market types cringe. But, the notion of limits comforted many in the public who felt angry at fat cat CEOs walking away from destroyed companies more wealthy than ever.
According to an L.A. Times article back in February, “Wall Street Finds Ways Around Executive Pay Caps,” Obama had suggested a $500,000 executive compensation pay limit on total annual compensation, as well as minimizing golden parachutes, for companies who received large bailout funds to keep them in business.
Do you think this use of executive compensation pay limits would be practical? Ultimately, the Obama administration didn’t think it was.
Recent History of Executive Compensation Packages
An AP article, “Geithner: Admin. Won't Seek Exec Pay Cap Limits,” published in early June explained that no executive pay limits are imminent, though the Obama administration does blame excessive executive compensation for a lot of the problems currently faced by the American economy.
But, Treasury Secretary Timothy Geithner seems to understand that it’s important to maintain some monetary motivation and work with executives, rather than trying to restrain or control them. What would be some more practical approaches?
Rethinking Executive Pay Limits
It’s obvious that the pattern of rewarding executives even when they fail is financially destructive. In fact, it’s not a capitalist view on executive compensation either. But, if that is the case, exactly how can executives be rewarded so that they come up with results that benefit more people than themselves.
In a Business Week article, “Getting Executive Compensation Right,” V.G. Narayanan sums the situation up by saying, ”Pay must be structured to attract the right executives and give executives effective incentives to lead their companies to great performance.” Exactly.
It’s really does come down to motivation. Here are some efforts to reward that could reap benefits for a larger group:
- A long tenure
- Better educated employees
- Consistent, long-term profitability
- Employee retention
What else? What if executive’s cash compensation was low until they achieved these higher goals? This is an important topic to ponder. What are your thoughts? Please leave a comment below.
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