One final comment from my side on exec (CEO) comp –

On the face of it, it seems obnoxious that CEOs are paid the sort of money they are and it causes a lot of heartburn as well. But the thing to remember is that, compensation at senior management level is not just about paying for a person’s worth, though that is one of the most important aspects of it. By paying those astronomical sums, the company is posturing or making a statement to its various stakeholders – competition, to current and prospective employees, to the shareholders and to the public at large. The company is essentially saying that despite the “temporary blip ”, the company is inherently strong and is poised to bounce back. It is also letting employees , current and future , know that if an individual is of high calibre, performs well and plays his cards correctly he could get what the CEO is getting.

And finally this is also insurance money – there is an agreement with the CEO (tacit or otherwise) that the s/he will not join competition and will not be vocal/open about the company’s secrets/strategies.

Despite this explanation, the sums paid out as settlements are absurd, but hopefully this , will make it seem less so.

Sajith,
Interesting article. You’re right compensation is not the only tool. But from what Sridhar has said, if the trader’s performance can be measured individually and compensated I have no problem. The problem is when we apply the exaggerated comp scenario is applied to CEOs.

I think Ganesh’s point is very important. It is all about corporate social responsibility. We need to have corporations move away from the profiteering at any cost model to a responsible corporate citizen model. It is high time that happens.

I believe various corporate scandals – Enron, Worldcom, sub prime fiasco etc was due to the emphasis that was placed on shareholders interests and not enough on social responsibility.

In the sub prime scenario – how many lenders’s looked at the quality and affordability of the home owner before doling out the loans. Did the mortgage companies think that the kind of pyramid scheme that Sridhar has mentioned would continue to keep working? The players involved were just interested in making a quick buck at the expense of the common man. Companies big and small, live quarter to quarter and are very reactive to the vagaries of Wall Street rather than pursuing the interest of the customers and employees.

I believe both can co-exist – a socially responsible organization that also works in the interest of the shareholders. It takes a visionary CEO to accomplish this.

Ganesh

This is what Martin wrote recently:
No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials – particularly, central bankers – fail to come at once to their rescue when they get into (well-deserved) trouble.

See this for more:
http://www.ft.com/cms/s/0/73a891b4-c38d-11dc-b083-0000779fd2ac.html?nclick_check=1

None of the execs are worth what they are getting paid. Exec compensation has gotten out of hand. For example if the AT&T CEO was worth a retirement package of around $170 mn, will he pay it back when the impact of the under-investment in capital expenditures becomes apparent? Or else, what about paying the ex-CEO of Countrywide, the mortgage banker, in sub-prime bonds instead of real cash – he is getting a package of around $120+ mn since his firm is getting taken over by Bank of America. Warren Buffett has proven that he can pay less and get quality execs – so higher compensation is not the real point here. The simple point is that shareholders interests are no longer being taken care of. This US disease is also spreading to India now…