The Find: The public is outraged over perceived excesses in executive compensation, but the experts at the Wharton School are unsure executive pay is really out of control and whether we have a workable plan to limit it.- The Source: An article in Knowledge@Wharton.
The Takeaway: President Obama proclaimed the $18 billion paid out in Wall Street bonuses in 2008 “shameful,” while Vice-President Biden was angry enough to haul out a naval metaphor. “I’d like to throw these guys in the brig,” he declared. It’s safe to say America’s leaders are reflecting a broadly held public sentiment: the fat cats are overpaid. Reform is needed. But is it really?
Wharton accounting professor Wayne Guay, for one, has his doubts. “Curbs on compensation might be justified if proponents can prove that high pay packages contributed to the current economic crisis,” he says, but “given the global nature of the economic meltdown… the cause of the collapse was not supersized U.S. executive compensation.” In Guay’s book, trimming CEO paychecks is all about public relations.
Finance professor Alex Edmans is skeptical that executive pay is truly irrational. “Despite some notable outliers,” he argues, “executive compensation on the whole correlates to results… a CEO who is even slightly better than a competitor is probably worth additional pay.” He also notes a double standard across industries. Rock stars and all-star sports players receive outsized pay, why not executives? He concludes that limiting compensation may only serve to drive the best bosses to foreign or privately held firms.
Finally, management professor Peter Cappelli comments that the real issue isn’t limiting compensation but instead restructuring it. Attempts in the 90s to link compensation and shareholders’ interests did encourage executives to act like shareholders. Cappelli’s question is, which shareholders? “They act much more like short-term shareholders than the widows and orphans holding the stock for 30 years,” he says. Though this is a flawed model, “no replacement model has emerged.” Until one does, Cappelli predicts, “little will change.”
Want more skepticism from academics? Columbia Business School’s Public Offering blog is the place.
The Question: Is limiting executive pay in the best interests of America?
