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My Two Cents

Executive pay, again

Chris Farrell Sep 25, 2008

This post by Nanette Brynes of Business Week certainly grabbed my attention, especially since I’ve gotten a number of emails from management consultants saying why executive pay shouldn’t be limited, despite the bailout.

But what justification is there for a $2 billion pay day for failure? How about $27 billion. Where is the relationship between risk and return?

The top executives at AIG, Freddie Mac, Fannie Mae, Lehman and Goldman Sachs pulled down more than $2 billion in pay over the past five years according to a new analysis by a professor at San Diego State University’s Charles W. Lamden School of Accountancy, Dr. David DeBoskey. …

Applying the same analysis to a broader universe of banks, financial firms, insurers, mortgage brokers and others who DeBoskey identifies as the companies likely to benefit from the proposed bailout and the total executive pay comes to $27 billion……

But even though DeBoskey describes himself as a “cynic” when it comes to moves to limit executive pay, he sees this as an inflection point. Moving forward boards of directors will have to find some better way to link executive pay to actual results, he says. “If the middle class is going to pay for this bailout through tax dollars, what they’re reimbursing these companies for is all this excess compensation. In my minds eye this is a classic redistribution of wealth from middle class tax payer to the rich who have received all this excess compensation,” he says…..

$2 billion in five years to 57 individuals ought to give that cause some momentum. It certainly gives a whole new meaning to the concept of the price of failure.

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