High Executive Compensation: a Wise Move for Employers?

We’ve recently seen a high degree of media and cultural attention surrounding the issue of extravagant executive paychecks. The collapse of Wall Street, taxpayer bailouts, and a declining economy that threatens the security of the middle class have all led to close scrutiny of this practice. And because the issue strikes a personal chord for so many of us, the resulting criticism has been laid on with a broad brush. “High executive compensation” has come to suggest a spectacle of greed and undeserved privilege, and we can’t seem to separate the motivation behind the decision from front page images of pampered maladroits who run their companies into the ground and then retire to mansions in the south of France.

But there is certain logic to this move. Otherwise it wouldn’t happen. In an recent session of my Manhattan College course, we discussed some of intricacies of the labor market—both real and imagined—that have led us where we are today in terms of executive compensation.

Here are some of the controversial statements we explored:

Worker compensation is measured not by the suffering of the worker, but by the returns he or she generates for the company. In other words, workers are not paid because they work hard. They are paid because their work generates money for others. A stay-at-home parent, for example, works very hard, but his work does not generate money for anyone else. A basketball player may not work as hard, but his labor is part of a long chain. Every ball he throws sustains a billion dollar franchise that enriches thousands of people.

True or false: Executives are genuinely talented, and in order to retain talent and keep it out of the hands of competing firms, companies need to invest. Does this statement have merit? Or can speculation unnaturally inflate the value of a person just as it sometimes can with a house, a commodity, or a work of art? Are overcompensated executives actually paid for the returns they generate, or are they paid because their value is falsely expected to continue rising?

Does extravagant executive pay betray the trust of shareholders? Does it cross not only ethical boundaries, but also the boundaries of good business sense and fiduciary responsibility? Or does it make sense to invest in a product that’s rising in value, regardless of the substance behind that speculation?

Join my class next time and find out how where the discussion takes us. In the meantime, feel free to comment below and share your thoughts on the subject!