May 04, 2003

Executive Pay

The argument used to be that executives needed to be paid very well on average because that was the only way to keep their own personal well-being hostage to the good performance of the firm--that executive pay needed to involve enormous amounts of risk to give executives the right incentives.

And now the argument is?

Economist: ...Last week, compensation arrangements claimed a rare victim: Don Carty, head of American Airlines, resigned after failing to tell its beleaguered unions that the company made a $41m pre-tax payment last October to a trust fund to protect the pensions of 45 executives if the company went bust. Last year Delta, another floundering airline, put $25.5m in a protected pension trust for Leo Mullin, its chief executive, and 32 other executives. Lucky Mr Mullin was credited for 22 years of service, entitling him to a much larger pension. Again, the aim was clearly to make sure that the chaps at the top have lifebelts if the ship sinks.

Increasingly, bosses' pay is structured to protect them from risk.... Pensions are emerging as the perk of choice. "Pensions, remember, are guaranteed pay," says Steven Hall of Pearl Meyer?especially when they are put in special trusts that are Chapter 11-proof. "There is an attempt to take the risk out of pay programmes."

Posted by DeLong at May 4, 2003 07:44 AM | TrackBack


What worries me is that it would seem that very very few people now defend this sort of compensation (or am I just completely out of it, being on the other side of the pond?), and yet it still is the rule rather than the exception. It would seem something is out of skew structurally, and either there needs to be a check on compensation committees, or these committees have to begin to get people who are not C.E.O.s. Otherwise, to mix metaphors, it's the blind feeding the blind.

Posted by: Andrew Boucher on May 4, 2003 08:51 AM

Yes, it is the rule. Ever more the rule and ever more damage being done to what had finally become a middle class capitalist economy. Again, the arrogance of the modern CEO seems to have no limits. The response of the CEOs of Merrill Lynch and Morgan Stanley to the fradulent behavior of Wall Street firms shows how endless the arrogance has become.

Posted by: lise on May 4, 2003 10:22 AM

At this point, it is fairly accurate to argue that the modern American corporation is simply a device to swindle customers, employees, and investors, and move the proceeds to uppper management.

Posted by: steve on May 4, 2003 10:32 AM

One of the justification of the higher pay of executives respect their subordinates was that they assumed more risks, and risk taking must be compensated. So all these risk-nullifying schemes are proof of the contrary, that those who truly affront risk are those who don't get compensated, an executive that gets a compensation some 200 times that of his lower-paid worker gets in a quarter as much as these workers in a life-time. And he gets them now, not in a nebulous future. And it is not only job-security, but also life: compare the number of executives of construction companies that die on their work to the number of workers that have that unfortunate "fate".

Risk pays for those who get others to get in it. Isn't it a saying on the tune of "other peoples money.."?


Posted by: Antoni Jaume on May 4, 2003 10:37 AM

Okay... I'm honestly curious (and maybe na´ve) here: I don't know much about how corporate ownership is structured, but isn't most, or at least a large portion, of stock controlled by large institutional investors? Why is it that these investors don't seem to have the time or inclination to keep control of boards? Why does Morgan Stanley, for example, not seem to care that executives take a lot money from them (along with other investors)? I know that not every individual has time to attend every shareholder meeting, but surely the biggest shareholders have time to monitor the biggest companies?

Posted by: Julian Elson on May 4, 2003 01:32 PM

Maybe because a lot of these same executives sit in them?


Posted by: Antoni Jaume on May 4, 2003 02:40 PM

The notion of these firms receiving state subsidies is offensive beyond words, and why anyone has invested these companies, beyond a purely speculative short term gamble, is unfathomable. In the everybody is an idiot sometimes dept. (perhaps), I think Buffett put some money into U.S. Airways in the late 90s. It would be interesting to find out how that turned out.

Posted by: Will Allen on May 5, 2003 09:25 AM
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