Just because something doesn’t always work, doesn’t mean it’s wrong

On The Economist’s current online debate, “Executive pay: This house believes that on the whole, senior executives are worth what they are paid.”, Nell Minow, Editor and Co-founder, The Corporate Library, writes in her opening statement that “Excessive executive compensation of the past decade is both a symptom and a cause of the current economic mess”.

Minow gives examples of companies like Countrywide, where the CEOs have abused their positions to push the boards to pay them even more, by for example hiring new compensation consultants when the current ones object higher executive pay. She also mentions Chesapeake Energy about which she writes the following:

“Frank A. Keating, Charles T. Maxwell and Frederick B. Whittemore, the compensation committee at Chesapeake Energy, not only paid the CEO, Aubrey McClendon, $100m, a 500% increase as the stock dropped 60% and the profits went down 50%, they spent $4.6m of the shareholders’ money to sponsor a basketball team of which Mr McClendon owns a 19% stake, they purchased catering services from a restaurant which he owns just under a half of, and they took his collection of antique maps off his hands for $12.1m of the shareholders’ money”

Now, I find this argumentation rather weak. There are certainly examples when the current executive pay system has failed. But the discussion should not be about whether the present system has flaws or not – everybody recognizes and agrees with that it does – what is up for discussion are performance-related pay versus restrictions made on executive pay by politicians.

To use these kinds of extreme examples as proof that executive pays driven by performance and by the market have failed is not very convincing. With the same mindset one could argue that democracy as a system has failed with reference to Russia, China and Cuba, where the political power is elected on paper, but on terms that many people would consider horrible. Or one could suggest that the current financial crisis was caused by free-market capitalism, when we know that the problem really was the lack thereof.

That McClendon of Chesapeake Energy was paid $100 million when the company’s performance dipped was not right, simply because it was not related to the (lack of) achieved results. It demonstrates a true flaw in the current system that needs to be improved. But that does not mean that the foundations – performance and competition – on which the current system is based, are wrong. It rather shows the opposite – that pay really should be related to performance.

Simon Hedlin Larsson

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