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Balancing CEO risks and rewards

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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.

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