Wednesday, September 17, 2014

The Overpaid CEO And The Corporate Mission

This article does a good job of describing and explaining the rapid rise in CEO compensation.  It provides an historical perspective, as well as an analysis of the factors that have contributed to outlandish rise in CEO compensation.  It also shows how the executive incentive system has had profound affects on long term corporate performance and the economy itself.

It will not be easy to change our current system because it is linked to our concept of the corporate mission.  The mission of the corporation is to increase shareholder value.  In order to effectively deal with the incentive system that drives corporate behavior we must move to a broader mission statement which includes more of the stakeholders in the corporation.  Some of the efforts underway in that direction are well described in this article.  It provides a critique of the shareholder value doctrine as well as some of the efforts underway to move toward a stakeholder theory of the firm.

Excessive CEO compensation has generally aroused public concern over its fairness.  This article goes well beyond the concept of fairness.  It argues that the corporate incentive system is a real and present danger to our economy.  Its fairly clear that the financial crisis that led to the Great Recession was aided and abetted by an incentive system that motivated corporate executives to engage in fraudulent behavior.  The rewards to executives, who originated fraudulent mortgages, that were packaged into securities, that were improperly rated, and sold to investors were enormous.  None of the executives that participated in the fraud would have retained their jobs if they had behaved otherwise.  The short sighted shareholders who invested in the financial institutions lost much of their wealth in the aftermath.  Few of the executives, operating under the doctrine of shareholder value creation,  were as adversely as their shareholders and the victims of the fraud that was committed.  We are all suffering from an economy that has not recovered from the damage that was done.

The financial crisis may have been an extreme example of the problems inherent in the incentive system that we have created.  The following quote, taken from the posted article, put the problem into a broader perspective:

Performance pay, on the model encouraged by the 1993 reform, has been tested. What we’ve learned is that it rewards not performance, but shortsightedness, excessive risk, and even fraud, and that the consequences go well beyond radical inequality to include the kind of crisis that nearly took down the economy in 2008, abrupt layoffs and plant closings to meet shareholder expectations, corners cut on products that risk consumer safety (as seen at General Motors), and desperate attempts to evade the costs of environmental and workplace safety regulation.

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