Executive Bonuses When the Bush Essay

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When he, representing the de facto shareholders the American taxpayers, found the executive compensation plans were out of line with the objectives of said shareholders, he acted.

In the free market system, this is the only response. Shareholders have rights and duties as the owners of companies. The executive team acts as their agents. The shareholders have not only the right but the capability to fire boards of directors and by extension executives whose compensation does not match their performance. The public outcry with respect to excessive compensation typically occurs when shareholders neglect their duty. Yet, there are examples where the shareholders have upheld their duty. These firms -- the majority -- do not make headlines, giving the impression that executive compensation is a rampant problem in society. If a company dares to pay bonuses will laying off workers or reducing their wages, the outcry hits the front page. However, the system as a whole is working well.

Arguments based on the pay disparity between executives and rank-and-file are largely emotional in nature. However, they are not entirely without merit. Executive compensation has been to some extent driven higher than it should by the irrational quest for the charismatic leader. Too many firms view executive talent as a genuinely scarce resource, which causes them to overpay top executives (Lagace & Khurana, 2002). Even Mehran (1995) readily admitted that it was not the size of the paycheck that determined managerial performance, but rather its structure. Like all irrational bubbles, however, the bubble that leads to excessive executive compensation will burst.

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The factors are already in place. The tax incentives on equity-based compensation have been removed and shareholder rights legislation has been improved as well. The rise of the institutional shareholder only heightens the ability of owners to reign in executive salaries and bonuses. Smart owners like Buffett already do.

Models of executive compensation are already shifting. Rational shareholders realize what has already been proven, that returns are lower with high executive compensation that encourages short-term risk taking (Sesil, Yu & Director, 2005). The free market is founded on the concept of equilibrium -- all markets will trend towards the right price for the good. Executives are no different. The market for executives was subject to investor irrationality and some tax-based distortions. With investors becoming wiser and more rational and the distortions removed, the market for executive talent is now trending towards the equilibrium. The market will set the right price. Boards will understand that compensation packages that reward risk-taking and remove responsibility do not serve the interests of the shareholders. It is already happening at most companies in America. A cap on executive compensation would only serve to introduce another market distortion, and would not adequately address any particular problem other than a public relations one. The market already has genuine solutions that solve the problem of excessive executive compensation. Allowing the market to correct itself is not the most effective way to deal with the problem, it is the only one that can be relied upon to work without introducing any new problems as a result......

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