Wednesday, May 20, 2009

More on CEO Pay

On ARI's blog, Voices for Reason, Don Watkins has a nice post about CEO pay, and how it is a challenging thing to get right, even in a free market. As he writes:
It requires a tremendous amount of thought and judgment. What should be the mix between base salary and incentive pay? What kinds of incentive should be offered–stock options, restricted stock options, stock appreciation rights? How should those incentives be structured–over what time frame and using which metrics? And what about a severance plan? What kind of plan will be necessary to attract the best candidate? And on and on. The mere fact some people make their living as executive-pay consultants illustrates how challenging the task is.
Now, it is sometimes difficult to determine what exists because of its competitive advantage, and what exists to comply with or avoid regulation. (Topic for a study, maybe?) Nevertheless, I think viewing CEO pay as a source of competitive advantage, rather than as merely an administrative, HR-ish issue, has interpretive benefits. It allows us to see that what the Obamanons, and the Bushies before them, are doing is waging all-out war on success. This goes way beyond the tax code. With regulation, you don't just take away the products of success, you force people to all do the same thing, thus ensuring that success in that area is impossible. This helps those firms who would never stay competitive on their own, and hurts those firms who innovate and create.

Put into CEO pay language, being able to appropriately pay an executive for his or her successful effort is a major strategic issue for companies (it better be, otherwise I'd need to switch majors). This is mainly because almost no one has any idea how to do it. Regulating CEO pay takes away any strategic elements, and "levels the playing field," so to speak.

"And the trees are all made equal
by hatchet, axe, and saw."

(Allow me one Rush reference every now and then.)

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