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Balancing CEO risks and rewards
Economics editor Chris Farrell
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TEXT OF INTERVIEW
Steve Chiotakis: A lot of people are angry over big bonuses being paid with government bailout money. If anything, AIG has personified a corporate culture that leaves a bad taste. But does that mean we need to look at a new model for executive compensation?
Economics correspondent Chris Farrell joins us now. Chris, how do we rationalize these big salaries and bonuses
in these days of corporate bailouts and government help?
Chris Farrell: Well, you know, you can't rationalize it. It makes no sense -- it's a perversion of a system. Now, I think that we have a very good model for how CEOs should be paid. Think of an entrepreneur -- you like entrepreneurs, right?
Chiotakis: Absolutely.
Farrell: OK, we all like entrepreneurs -- they take an idea, they take a risk, and every once in awhile, they succeed. And you know, when they succeed, they create jobs, they innovate. And if they want to go out and buy a Lamborghini, we say go buy that Lamborghini. If you want a jet, go buy that jet. You want two homes? That's fine. Because most of the time, they take the risk and it fails. And then maybe they lost their home or maybe that 401K needs to be replenished. So there's a real balance between risk and reward. But when it comes to the nation's CEOs and these people at AIG it's all reward and no risk.
Chiotakis: So what kind of compensation model, then, works in this environment?
Farrell: Well, I think there's a couple of things. First of all, I think let's just make every CEO just like an entrepreneur. So times are good, they can get their benefits. Times are bad and they lose their jobs, they don't get their health care, they don't get the pension. And why don't more CEOs today act like the head of Japan Airlines? Now, he's laying off workers, they're having trouble, guess what is salary is -- $90,000 a year, and he stands in line in the cafeteria. That's the sort of example CEOs should be giving. Times are good, they make bets, I got no problem. But when times are bad, they're laying off people, they should suffer, too.
Chiotakis: But does the marketplace take care of this, Chris, or is it the government? Who's plan should this be, and how does it come to be?
Farrell: Well the reason why I don't want government to be doing it is because you come up to this very real problem about one size doesn't fit all, and the politics, which you just can't get out of there. But the big question I have is at what point are the boards of directors, who have the responsibility for doing this, at what point will the boards of directors exercise their responsibility? So I think there's a very simple message to the boards of directors of America's corporations: take a look at the anger that's out there. If you don't convince the American worker that there is fairness in CEO compensation, then you know what? People are going to be angry enough, politicians will respond to that anger, and government will do it. And that will not be good.
Chiotakis: All right, economic correspondent Chris Farrell. Chris, thank you.
Farrell: Thanks a lot.
About the author
Christopher Farrell is economics editor of Marketplace Money, a nationally syndicated one-hour weekly personal finance show produced by American Public Media.
It's true enough, that American's have short memories,unless you've been personally effected by one of these CEO's and others at the top. I think what's happening is that the big companies have finally screwed too big of a group of people to have it fade from memory now. Qwest CEO Nacchio is still fighting, and we are still paying for his lawyers, after all his lying which almost bankrupted that company. Shareholders like us, don't have any power. You have to own most of the stock to make a difference when voting on compensation. Believe me, I've voted against it for years, to no affect.
There is a missing link in all of this outrage. The fact that the taxpayers are now majority shareholders in these troubled companies (80% in the case of AIG) should have put us in a decisive position on their Boards of Directors. We have allowed the legislators to take a legislative approach and not actually provide the oversight that is the fiduciary responsibility that comes with a seat on the board. The Fed, Treasury, Congress and the Administration(s) have all failed the most basic test of investing. If you are putting in the most money, you get to define the rules of engagement. As an involuntary shareholder, it is beyond comprehension to me that we don't talk about that.
The Board seat at AIG should have come with appointment to, if not chairmanship of the Compensation Committee. Then the bonus fiasco would not have happened.
Chris missed the trick this morning. This is not just about greedy CEOs. It is about abdication of responsibilities by these firms' supposedly independent boards.
Executive compensations have been out of hand for a while. It is often argued that the "risk" is why they should deserve extraordinary pay, as well as attracting the best talent.
Both are over exaggerated. To be truthful, much of this "talent" can be cultivated from rank and file employees for much less cost. It used to be very common to promote from within, particularly for performance. This has declined greatly and almost completely during the past thirty years. Even so, the "talent" have become expectant of a certain salary and benefits largely due to conditioning. Too much in absorbed in bureaucracy inside these corporations.
In regards to risk, there is even more of a sham. The owner of a business has much more risk exposure than a hired CEO. But further, a CEO's difference in risk is not so far from the average workers'. While it's true that a CEO could topple a company almost single-handedly if insanity was present, the personal effects of his job are almost identical or better then that of the blue collar employees.
While CEO's often deal with massive amounts of stress trying to make and keep a company profitable, it not much different to the stress levels of a blue collar worker trying to make ends meet. The CEO constantly worries about the company but the worker constantly worries about having enough money for home, transportation, children, retirement and many other things. Many workers rack their bodies daily. It's odd that CEO's usually start with healthcare better than any of their employees, nevermind that they have more money to meet deductibles than the average worker. They also generally start out with the maximum amount of vacation time (or more) than a blue collar worker.
People forget that anytime a person gets a job somewhere, they are taking up risk as well. Many people are discovering that now. Will the company you are choosing be there in ten years? Will they lay you off at any time? How will their healthcare change? Will you be forced into hours that make it impossible to care for your children?
It's always an opportunity cost. You don't know which company will make it, but you work your best for them and hope that they will keep you around so that you can meet your own obligations and objectives.
Keep in mind massive executive salaries allow executives to truly save money. When most of their bonuses are more than one of their workers make in year, they are much better prepared for unemployment because they have the means to be. A loaf of bread or gallon of milk costs the same when you are at the grocery store.
If you need to assess the risk that workers take on, ask any blue collar worker that is now unemployed that is eating away at their "retirement" savings just to keep a roof over their head while they wait for a job, that in today's economy will assure a lower salary. Maybe they should have picked a different employer, but to me that's risk.
I think that Congress should pass legislation regulating salary levels for all publicly held corporation. It's not practical for shareholder to attend stock holder meetings and know what the issues are when they get there. The whole system is a sham of a democracy.
Since 401K's are the backbone of the nations retirement plan, citizens need protection from a corporate system that puts their needs way after the needs of upper management in the corporations. Unregulated capitalism just isn't working.
Complaints about CEO compensation are decades old. Expecting Boards of Directors to do anything to address the issue is asking the fox to gather your eggs. Their compensation is just as immune from corporate failings as the CEO they hire.
Where are the shareholders? They can no longer take a hands off approach. The larger shareholders like pension funds and mutual funds are the groups with the leverage to force the needed changes. Can they? The final analysis shows that the model of corporate governance is broken.
Mr. Farrell;
From your lips to God's ears. As a natural born cynic, I think your words will only hit the ceiling. As one of those angry workers, I hope CEO's understand that many of us are pressing congress to do something about this outrage.
I hope they can learn... Puppies yes, CEO's not so much.
If a person
