A lot has been written in recent weeks regarding executive pay and how it should work. People are outraged at the salaries some executives pull down each year. The economy is in the tank, people have lost and are losing jobs, and times are tough. People are generally unhappy about the fact that an executive at an investment bank made tens of millions of dollars while lots of people would be happy just to have a job. Recently, Goldman Sachs’ CEO Lloyd Blankfein weighed in on the issue, calling for greater hedge fund regulation and restrictions on executive pay. One thing that makes this interesting, is that Blankfein made $42.9 million in 2008. Check out this post to see how some other CEOs have faired as of late.
I think its commendable that Blankfein is speaking out against executive compensation practices. That being said, he’s in a perfect position to do something about them. He can implement compensation restrictions at his own company. In the Essays of Warren Buffett, a compilation of the annual letters Buffett writes in his role as the CEO of Berkshire, Buffett has consistently criticized the incentives that are created by awarding options as part of executive compensation packages. Buffett’s argument is that options give executives an incentive to try to increase prices over the short term, which leads to excessive risk taking. I think companies being over-leveraged, like they have been recently, would support Buffett’s argument.
I’ve stated on this site before that I don’t think that the government should involve themselves in the executive compensation problem with legislation. I still believe that the market is the proper means for prices to be set for whatever it’s pricing, including executives. The people who really need to put their foot down with regard to executive compensation are the shareholders. Unfortunately, it’s very difficult to make your voice heard as a small shareholder. Large institutions tend to be the largest shareholders, and often they have very little interest in removing highly paid executives. After all, the people running the institutions are highly paid executives as well. No doubt they think they’re worth it.
The problem with being a shareholder in a company whose management you disagree with is this: if you’re angry enough to try to change the management there’s a much simpler recourse at your disposal. You can simply sell your stock if you don’t like the way a company is being run. If you think salaries are too high, it’s much easier to sell it than to complain about management to someone with the potential to do something. It’s far easier than trying to start a proxy fight and convincing enough shareholders to see things your way to matter.
One company, Amgen, has decided to take a different tact. They’re openly soliciting shareholders for advice regarding how to handle executive compensation going forward. Maybe this will catch on. If people like Blankfein prove that they’re doing more than just playing lip service to what the common man wants to hear, things could change for the better. Hopefully lots more companies decide to follow Amgen’s lead. I’ll believe it when I see it. Thanks for reading.
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