Executive Pay and the Credit Crunch Revisited
March 11th, 2008In my last post I blogged about executive pay and the credit crunch (see The Credit Crunch and Executive Pay). In that blog I suggested that the the issue of excessive executive pay was an economy-wide problem, and not specific to firms that were party to the credit crunch. Mike Barnett, my colleague from the University of South Florida, called my attention to a recent article that married the two issues quite nicely. I invited him to blog on the topic. Here are his comments…
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I buy the mantra that if CEOs captain their firms to big paydays, then they deserve a sizeable chunk of that payday. This is how we justify the astounding rates of CEO pay. After all, the daily earnings of a CEO often exceed the annual earnings of the average employee. We often forget about the other side of this arrangement — when the CEOs captain their firms to big losses, then they deserve a sizeable chunk of that loss. As the bottom is falling out of the market, we get a chance to see how well this downside sharing holds up in practice; bottom line — it doesn’t.
According to an article from March 5th’s WSJ (see WaMU Board Shields Executives’ Bonuses), when the going gets tough, the tough rewrite the rules to favor their executives:
“The board of Washington Mutual Inc. has set compensation targets for top executives that will exclude some costs tied to mortgage losses and foreclosures when cash bonuses are calculated this year. The move, approved last week and disclosed in a securities filing late Monday, essentially shields the pay of chairman and chief executive of the thrift, Kerry Killinger, and more than 100 other executives from the continuing mortgage fallout.”
WaMu reported a $1.87 billion loss in the fourth quarter and in the past year its share price dropped about 70%. And yet we’re talking about bonuses here that top executives will receive — on top of substantial base salaries that are supposed to compensate them for, …um, doing their jobs.
The article concludes by quoting another CEO, who said that “the board was being realistic” in rewriting the rules:
“It might not be politically correct, because the captain’s supposed to go down with the ship. But in the real world, that’s not how it works.”
No, apparently it doesn’t — in the real (contrived) world, when the ship is sinking, the execs get to hop onto their life yachts, while the shareholders sink.
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Michael Barnett is an Assistant Professor at the College of Business Administration at the University of South Florida and a Research Fellow at the Kiran C. Patel Center for Global Solutions.
March 11th, 2008 at 8:38 pm
In other words… the board decided to exclude loan losses? Seriously? So their business, is, um… making loans, right? And the Board of Directors decides it’s OK to exclude loan losses? Can someone pass whatever it is those guys were smoking over this way? I think I need a hit.
Oh, and now that I’ve taken the magic pixie dust, and I’m an executive at WaMu and here’s what we should do… let’s write down as much as we can. After all, it won’t affect our bonuses. Then, when things improve, we can look like we hit a home run with earnings and guess what? That does impact our bonuses. Woo hoo! Someone pass the bong.
Only in America.
September 29th, 2008 at 5:40 pm
Wouldn’t an all round absolution of debt be an appropriate restart of the economic scenario at this point, especially in the US?
It is a strategy that dates to ancient Hebrew tradition, where it was at one stage applied in 49 year cycles to resolve the accumulative complexities of a credit driven system.
It will immediately enable the broad consumer base to start spending on strength of regular income, implying an upward revival of market forces, working its way up through retail, wholesale and industry, with credit facilities kicking in in due course.
A debt free entity is a creditable entity, which is the fundamental factor about which the credit industry turns.