Bloated executive pay and the excessive risk-taking behavior provokes the most public and political outrage
In the search for culprits in the global financial meltdown, bloated executive pay and the excessive risk-taking behavior it fueled stand out as prime suspects. Of the two, pay dominates the headlines and provokes the most public and political outrage.
Pitchfork populism over the issue reached a crescendo last March when insurance conglomerate AIG, kept on life support with up to $183 billion in taxpayers' cash, dished out bonuses totaling $165 million to 400 employees in the London office whose derivatives trading nearly destroyed the company. Lavish pay for poor performance wasn't just an AIG phenomenon. On Wall Street, it was endemic. Bankers gave themselves nearly $20 billion in 2008 bonuses, even as the economy was spiraling downward and the government was spending billions on bailouts.
Major business groups lost no time denouncing the reform measures as vehicles for ceding enormous power to a small number of special-interest investors, namely, unions and public employee pension funds that, not surprisingly, favor the reform measures. "Big labor unions are trying to achieve at the board table what they cannot achieve at the negotiating table, under the guise of shareholder protection," said David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness. The Business Roundtable was no less emphatic. "This is an unprecedented preemption of state corporate law… that will turn boards of more than 15,000 publicly traded companies into political bodies and threaten their ability to function," said Roundtable president John Castellani.
Having said that, we need to unpack pay issues to understand why, for example, many of the executives on Wall Street were given such large bonuses for one year's performance. That's a practice that needs to be examined.
This article was provided with permission from Harvard Business School Working Knowledge.