For many years politicians have been complaining about the perceived over-paying of management in public companies. Everyone has heard about the huge golden handshakes given departing executives upon leaving companies they have destroyed. John McCain has stated “all aspects of a CEO’s pay, including any severance arrangements must be approved by shareholders” (Mason, 2008). An article in The Economist (2008) argues though that although managers pay has gone up faster than workers pay, managers pay is by and large based on financial returns.
The Economist article goes on to point out that workers pay is subject to the whims of the labor market, while stock options and other pay incentives encourage managers to create more wealth for shareholders. Prices in the labor market are being kept from increasing largely due to the increased competition in the global economy. Managers on the hand are harder to outsource and competitors, having similar skill sets, are also looking for higher pay. Another factor that The Economist (2008) points out is that as a company’s assets grow so do the salary expectations of management.
Politicians like to talk in short sound bites, thus forming populist opinions as evidenced by the John McCain quote. As soon as politicians insist on “fixing” a perceived problem, there will be a shortage of managers in publicly traded firms. Why is that? In reality shareholders do determine managements pay through the election of the Board of Directors. Certainly cases of egregious disregard for the shareholders welfare can be found, but in most cases managers have a stake in building shareholder value encouraging maximization of stock value. Individual shareholders may not wield much power, but legislation regarding pay for management simply will not work.
Stockholders take risk in order to get a reward and as risk goes away so does reward. Managers control the direction of the company and shareholders should want the best management team money can buy. If the board determines that severance pay is needed to facilitate the departure of a CEO to get a new direction started, that should be acceptable to any shareholder.
Mason, J. (2008, June 10). McCain wants low corporate taxes, regulated CEO pay. Retrieved June 19, 2008, from http://biz.yahoo.com/rb/080610/usa_politics_mccain.html
The Economist. (2008, June 12). Executive pay: Let the fight begin. The Economist. Retrieved June 19, 2008, from http://www.economist.com/opinion/displaystory.cfm?story_id=11535704.