(Bloomberg News) Bonuses to senior executives are shooting up. They're a good reminder of what Congress forgot when it was reforming the financial system. Excessive pay isn't a problem just at banks; it's endemic to the culture of corporate America.
Excessive and ill-conceived pay encourages chief executive officers to overreach and misallocate resources. And to be honest, except in rare deserving cases, eight-figure bonuses make me angry.
Why should one writer's pique matter? Because one of the biggest threats to American democracy is inequality. When people lose faith in the system, institutions suffer. People stretch to buy homes, or overuse credit to match their neighbors. And when executives earn more in a half day than teachers do in a year, talented people don't pursue careers in education.
Executive pay shouldn't be set by government (or by op-ed writers). It should be set by shareholders. But shareholders don't have a real voice. And the pay system is way out of line with any rational system of incentives that would serve their interest.
In the coming proxy season, you will see executives getting huge raises and justifying it on the basis that their stocks and profits are up. But a CEO's impact is felt over many years--not just one. A single up year doesn't warrant a big bonus if the longer-term performance was mediocre. Nor is simply riding a stock down and then up again cause for celebration. When a batter in baseball slumps to .200, he doesn't deserve a bonus for getting his average back to .250.
Justifiable Pay
True pay-for-performance doesn't mean doling out an extravagant sum for matching the market, or awarding a can't-miss stock option. And the executive who receives stock options year after year is almost certain to get an award, some year, when the stock is at a low, guaranteeing a profit.
Most of all, in a rational pay system, executives who stand to make large returns would run the risk of personal loss. That that doesn't mean cutting pay in some categories while compensating with raises in others.
In recent months, one of the most abusive pay packages was that of Larry Ellison, CEO and founder of Oracle Corp., the world's second-largest software maker. Ellison is a perennial league leader in excessive pay, though he draws little notice because Oracle's compensation is announced off-season, in September.
Last year, Ellison reduced his salary to $1. How magnanimous. He also got a whopping $62 million in stock options, in addition to $6.5 million in "non-equity incentive."