Executive Pay

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Introduction

During the Credit Crisis, executives at some of the major financial institutions received massive salaries and bonuses even though at this time a lot of these financial companies were in the red and some required government bailouts to be saved.  The question is was these executives compensated too much since the companies they were running were failing and eventually need government bailouts and should the government step and limit executive pay or does that defeat the purpose of striving for greatness?  With bonuses some of the CEO’s made hundreds of millions of dollars, while the company they are supposed to running is hemorrhaging money. Should these executives be obligated to pay back some of this bonus money they received during the credit crisis?

Body

In 1965 the Average American CEO salary was 24 times as much as the average worker, and by 2007 that number had increased to 275 times as much as the average worker (Owens 2009).  There are several examples of large financial institutions that paid their executives large salaries and bonuses.  American International Group received $170 billion from the government in efforts to rescue them during their downfall, but at the same time gave employees of their financial services department $175 million in bonuses (Owen 2009). AIGs executive Joseph Cassano was employed there from 1987 to 2008, over that time he earned $280 million including $34 million in 2008 as a bonus (Schecter, Ross, & Rood 2009).  After all the losses were discovered and after Cassano was fired, he was still receiving $1 million is pay monthly from AIG until congress stepped in and ended that (Schecter, Ross, & Rood 2009). 

        Thomas Montag an executive for Merrill Lynch, received the second largest bonus on Wall Street in 2008 (Corkery 2009).  Montag was paid $39.4 million in bonuses even though he was the primary reason that the company lost $15.32 billion in the fourth quarter in 2008 (Corkery 2009).  Richard Fuld was the CEO of Lehman Brothers, he earned $184 million in salary from 2003-2007, during this time he turned Lehman into one the riskiest institutions on Wall Street by loaning money to real estate developers and investing its own capital (Corkery 2009). Bear Stearns the company that was eventually married to J.P Morgan Chase because over risky subprime mortgages paid their CEO James Cayne $163 million between 2003 and 2007 (Corkery 2009).

        Countrywide Financial paid Angelo Mozilo $471 million from 2002 to 2007, the company was eventually bought out by Bank of America, Countrywide was a subprime lender who underwrote mortgages that ended up with high default rates (Corkery 2009). Another CEO named Aubrey McClendon who worked for Chesapeake Energy was paid 112.5 million with a bonus of $80 million the same year that the company’s stock dropped 40% (Owens 2009).  All these companies paid their CEOs and other executive’s super high salaries and bonuses despite the fact they all were in dire straits and some were eventually bought out or bankrupt. 

        Deciding whether or not these executives were paid too much is all a matter of opinion, it is obvious that they are were paid handsomely, all examples given made well over $100 million dollars in just a matter of a few years, the average worker will not even make 1% of that amount in their lifetime of working.  A popular proposal is to limit executive pay to 20 times the amount of the average worker (Frank 2009), which is less than the ratio stated above in 1965.  It is accepted that executive pay in the United States is extremely high even when compared to other countries, executives in other countries are paid on average 1/5th of the average American executive pay even though their performance is equal (Frank 2009). 

An argument against capping executive pay is that there are a limited amount of talented executives, and if salary was to be capped these executives would have less reason to use all of their talents when a less talented person at competing company makes the same salary. Managerial talent is more significant when it comes to large companies, the difference in talent can amount in a difference of millions of dollars for that company, so large companies must be willing to offer talented people with higher pay than average people, salary capping would limit company’s ability to make the greatest possible profit. An example of hiring a talented manager is Louis Gerstner Jr. who after having success at RJR Nabisco was hired at IBM, who at the time was failing but he was able to turn the company around in the 1990s (Frank 2009). 

The biggest argument for capping executive pay, is the credit crisis of 2008, and the amount of money tax payers had to fork over in order to bail out some of these companies that were led by highly paid executives that weren’t doing their job.  So congress must ask is the anger of voters a good enough reason to cap executive pay. So when it comes to the question of executive compensation being capped I do believe that making over $400 million in a matter of 4 years is quite excessive.  But capping at 20 times of the average worker might be too low, let’s say the average worker makes $50,000 annually that would mean a CEO would make $1 million annually, now $1 million dollars is still a lot of money and that person certainly wouldn’t be hurting financially if they lived within their means, but that average worker might be an underwriter and they have a specific job they do every day and their responsibility is limited to only what they do on the day to day, while the CEO or other top executives are responsible for the complete health of the company, including what their employees are responsible for, so the risk of being a CEO should be compensated accordingly. When it comes to putting a quantitative amount on the cap, it is hard to say but I think 20 times is a little too small considering executives made more than that in the 1960s.