Friday, March 24, 2006

Executive compensation

Paul Krugman in today's NYT:

Forbes tells us that the compensation of chief executives at the 500 largest corporations rose 54 percent in 2004. In effect, Bill Gates walked into the bar. Average income rose, but only because of rising incomes at the top.

Speaking of executive compensation, Mr. Snow, it hurts your credibility when you say, as you did in a recent interview, that soaring pay for top executives reflects their productivity and that we should "trust the marketplace." Executive pay isn't set in the marketplace; it's set by boards that the executives themselves appoint. And executives' pay often bears little relationship to their performance.

You yourself, as you must know, are often cited as an example. When you were appointed to your present job, Forbes pointed out that the performance of the company you had run, CSX, was "middling at best." Nonetheless, you were "by far the highest-paid chief in the industry."

Krugman says that the economic situation today is as though the wealthiest of ten men at a bar walks out and Bill Gates walks in. The average income and wealth has greatly increased, but the nine haven't seen any change in their situation.

Why did I post this? I don't believe the US is anywhere near a free-market economy, as you may have gathered from previous posts; it wouldn't be so easy to find counter-examples otherwise.

Is the above about chief executive pay some kind of liberal/leftist handwringing?

From a March 6 news-item I found only in google cache:

Berkshire Hathaway Inc. Chairman Warren Buffett used his latest annual letter to shareholders to blast excessive executive pay, a ballooning U.S. trade deficit and rising fees for professional money managers.

"Too often executive compensation in the U.S. is ridiculously out of line with performance," said Buffett in his 2005 letter.

Buffett said the problem lies in the way executive compensation is decided.

"Huge severance payments, lavish perks and outsized payments for ho-hum performance often occur because comp committees have become slaves to comparative data."

Buffett said compensation committee members are bombarded with pay statistics and told about new perks that other managers are receiving.

"In this manner, outlandish 'goodies' are showered upon CEOs simply because of a corporate version of the argument we all use as children: 'But, Mom, all the other kids have one.'"

PS: Is there an Efficient Market in CEO Compensation?