Excessive executive compensation frequently breeds resentment, undermines consumer faith in the financial system, and overly stigmatizes otherwise common business failures. Frequently, the opponents of lavish pay packages compare executive compensation to the compensation of rank-and-file workers. Such criticism reflects perfectly appropriate societal concerns over pay equity and distribution of wealth within a society. An entirely separate source of friction is the shareholders’ right to benefit from the corporation’s wealth. Shareholders’ dividends are directly reduced by the company’s expenses, one of which is executive compensation. For most of today’s public companies, the executive compensation expense is often negligible when considered in light of mammoth balance sheets. However, these amounts are still large and lucrative for their individual recipients. More than once, the incentives of executives have conflicted with the long-term interests of shareholders. In the most unfortunate scenario, executives’ personal interests can tumble a corporation and send ripples of pain elsewhere. To prevent such a result, independent compensation committees have been charged with creating appropriate incentives for executives. And recently, when these committees have proved to be imperfect, additional legislative efforts have been introduced. As it unfolds, this paper attempts to answer the following three questions.
First, how meritorious is the claim that misaligned incentives on executive pay can trigger worldwide financial turmoil?
Second, how consistent is Business Roundtable’s guiding principle for executive compensation—that executive compensation should be closely aligned with long-term shareholder interests—with the reality of executive compensation in today’s corporate America?
Third, what would be the scope and the efficacy of any proposed legislative check on executive compensation?
Creative Commons Attribution 4.0 International License (CC-BY 4.0)
