Lately, excessive executive compensation is attracting attention. Various sources are reporting that executive compensation in the “new economy” is reaching levels unseen before. Avarage executive pay is hundreds of times of avarage employee pay. This is orders of magnitudes higher than how it used to be. Are we jealous? Yes. Should we stop this practice of excessive pay for the executives? Yes. But the reason we should do so is not based on our emotions of envy. It is based on the necessity that I will explain now.
Currently, a CEO’s success is evaluated based on the money his company earns during his service time. He comes into power, company makes billions, he takes his salary, bonus, cashes options and walks away. Next year the company may go bankrupt. But why would he care? We have seen this game play out time and again, especially in the financial sector where two years ago avarage employee bonus was 600,000 USD. And a NYC restaurant was boasting about wine sales to Wall Street types for 30,000 USD a bottle. Now some of those employees are laid off and their companies are on life support. What was the purpose of paying these people -who run their companies a ground- that much money? The CEO and employees who cashout a lifetime of pay check in a year do not have the incentive to make the right decisions for the long run. They cannot bite the bullet and say no to sin if they have to forfeit short term profits. The shareholders must reign in and force them to do so. For that to happen, the government needs to stop bailing out these companies so that share holders get punished for their utter lack of care over what company they invest in. Otherwise indifference will continue and the good and the bad will not be sorted out. We must let the free markets work without government intervention so that the truth shall prevail and we can follow the truth instead of the desire of our hearts.
Let us say the share holders woke up and want to do something. What can they do? They can do the following:
1. Cap executive salary at 4, 5 times the avarage employee salary.
2. Provide attractively priced stock options that will vest (regardless of whether the executive is still in the office or not) in the next 20 years as part of the total benefits.
This way executives can still get good pay over the long run if their companies perform well which makes their options worth more. And they will have some incentive to make long term decisions because their pay depends on it.
If the government wants to interfere with the markets, it should add the following:
1. Do not tax dividends.
2. Tax capital gains at a prohibitive rate such as 80%.
This will have the following effects:
1. Encourage the companies to pay dividends as a way to pay the shareholders.
2. Remove the hope of getting rich through speculation of higher and higher prices that cause bubbles.
It is not success to merely paint a positive picture to propell the stock price higher so that shareholders are happy and the executive can get his pay. Propelling prices based on hopes and wishes is a lie and it is almost criminal.
If a business is sucessful, it should be able to generate cash and pay dividends. Why should I have to sell my company to make money? I should be able to own it and make money through dividends.
Currently, the WALL Street is nothing more than a casino. Those who get out at the right time will run away with the money. Others who do not have time to study and time the market will be left behind as usual. Some compare this great recession to the deflationary crash of great depression. Pension plans, 401Ks, individual savings are all invested in stocks or risky bonds. A decline can wipe out huge amount of wealth that we think we have.
Many people’s retirement is at stake and it is sad to see few are aware that they are gambling it away. There are sharks who trade these markets at the 401k accounts’ expense and they will certainly benefit from this indifference and run away with the money. Executive pay plays a role in the true valuation of these companies and we need to fix it for an honest financial market.
