Sane Words on Executive Compensation.

I’ve blogged about the ethics of executive compensation before, and I likely will again. It’s a great topic. But I’m the first to admit that it’s not something I know a lot about. It’s a fairly technical matter — which is one of the main points I like to make about it. Any analysis that boils the issue down &as many of them seem to — to “they’re paid a lot and do lousy work” is bound to be inadequate.

But there are people out there who at least understand what the relevant pieces of the puzzle are, even if they don’t claim to be able to give precise prescriptions. Witness this very nice, short piece by Harvard Business prof V.G. Narayanan, writing on the Harvard Business Review Blog: Executive Pay: It’s About “How,” Not “How Much”

It seems we are moving from an era when “greed was good” to one in which “jealousy is justified”–the executive-compensation regulations being considered now by the government and advocated by shareholder activists aren’t very thoughtful, and I believe they’re born out of jealousy and misinformation.

But “How much should CEOs be paid?” is the wrong question to be asking right now. The right questions are: “How should they be paid?” and, just as important: “Should changes in the way CEOs are paid be mandatory or voluntary?”…

Its worth reading the whole thing (it’s quite brief). And do note that Narayanan is strongly in favour of reform in how CEOs are paid. It’s just that he eschews simplistic solutions.

Narayanan’s main point is roughly that appropriate executive pay depends on corporate strategy, something which is (and should be) highly variable. Government-imposed one-size-fits-all pay structures are more likely to do harm than good. I’d only add that, to the best of my knowledge, there simply is no well-worked-out theory of the “true” value of labour. It’s kind of hard to argue coherently that a particular CEO’s salary is unethically high when you can’t give a reasoned account of what the “right” salary is. And doing that requires looking at the details.

2 comments so far

  1. Bob Ryan on

    Thanks for pointing out Narayanan’s article. It is a sane approach in this challenging landscape. May I also suggest that as the board and execs are considering “acting in the company’s best interests”, they need to keep in mind the messages their actions are sending to the public. (See my article on CEO Compensation)
    Corporate values, as you well know, are not just what is written in the Ethics Statement, but what is acted out in the board rooms.

    -Bob Ryan

  2. DarryleHuffman on

    An article in the New York times stated that most banking ceo’s make 2 to 3 million a year and after all the bills are piad they still end up with an account near zero. They spend for things to try to keep up with the culture thier involved in. To reduce thier income would be in some cases detrimental because they would have to change the lifestyle to reflect the new pay scheme. (Allen,2009)

    Salkin Allen You Try to Live on 500K in This Town Feb 6 2009 retrieved June 25 2009

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