Friday, February 27, 2009

What I Have Found About CEO Pay

There was a pretty good op-ed in the Wall Street Journal the other day describing how the amount of CEO pay is not the problem, and how we should be concerned more with the method of payment. The writers seem to imply the government should get involved, but other than that, their observation of the problem in executive compensation is pretty true, namely that executives are not compensated for long-term corporate performance, even though they are supposed to be.

I wrote my senior thesis on this topic, and what I found was that "long-term compensation" does not have any relation to long-term thinking or performance. This does not mean the government should get involved, but it does mean that boards need to get off their asses and design original ways to compensate their employees.

An interesting phenomenon I found was that pay packages that included goal-based remuneration tended to yield more manageable results amid the present financial crisis than did flat-out grants of stock or stock options. Objectivist business scholar Edwin Locke has produced excellent research on the positive performance effects of setting goals.

This is an area I intend to research more deeply over the years. It is unjust to provide employees (executive or otherwise) with vague goals, compensate them for something totally different, and then chastise them for not achieving a more specific goal you never laid out. Rational achievers will not want to work under such conditions. Providing specific goals, and linking pay to achievement of said goals, is not a sign of distrust in the executive, it is a clear signal that you know what you want, and you trust the executive to come up with some way to achieve it.

I will write much more on this topic over time.

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