19 March 2009

Executive pay: how much is too much?

The U.S. is quite rightly experiencing a flurry of outrage about AIG execs scoffing up healthy bonuses after running their company into the ground, and this on top of the corporation accepting a $170-billion handout from the federal government. Scandals about corporate executives piling up exorbitant incomes from salaries, bonuses and stock options, even if their companies are tanking, are commonplace these days. It prompts the old question: how much should the top guys be paid? How much more reward do they deserve than the people at the bottom?

The usual corporate defense of excessive incomes for executives is that they have to pay these amounts to get the best people. The United States most successful investor, Warren Buffett, disagrees. Mr. Buffet, chairman and chief executive of financial conglomerate Berkshire Hathaway and the world's second richest man after Bill Gates, pays himself, as he has for years, an annual salary of $100,000. Including directors' fees, he makes a grand total of $175,000 a year. He is somewhat more generous with his employees but not excessively so. The highest salary at Berkshire Hathaway is paid to the company's chief financial officer, Marc Hamburg, who made $786,500 in 2008. Buffet is an outspoken critic of lavish executive compensation packages and doesn't offer bonuses and stock options. If Berkshire Hathaway can achieve the outstanding success it has without paying anyone more than a million dollars a year, it's hard to see why any company should have to.

The idea behind generous compensation, particularly with stock options, is that it will improve executive performance and therefore company performance and therefore provide bigger rewards to stockholders. Unfortunately, the compensation seems to have become an end in itself, independent of either improved executive or company performance. That isn't surprising considering boards of directors determine executive pay, and boards of directors tend to be made up of local management and presidents and chairmen of other companies, usually chaired and dominated by the CEO himself. Quite naturally, these incestuous bodies take care of their own. And in doing so they often overlook the fact that all employees contribute to a successful organization, not just the top guys.

In any case, it hasn't worked. Lavish salaries seem to contribute more to greater greed than greater performance. Corporations might all do better following Warren Buffet's example: if it's over a million, it's too much.


  1. It has often been observed that power, not money, is the real attraction, which explains why some people of affluence are drawn to politics.

  2. Not only don't other companies have to do so, but spectacularly overpaying executives causes great harm top the companies that do so. Paying executives well makes sense. Executives acting like dictators looting their countries does not. Unfortunately too many companies have allowed their treasuries to be looted by a few unethical executives and board members.