Are laws that limit executive compensation simply enough to turn financial institutions and other corporations away from the entrenched norms of exorbitant compensation and bonuses? Before I address this question, let’s consider a hypothetical scenario:
Assume a new law required $500,000 cash salary cap for the top 10% of executives of the company, and also limited the amount of stock options they could be offered in the future. (Sound familiar?) Do you think that Enron’s executives would dutifully comply with this mandate if it were enacted while they were still in existence as a company?
Well, judging from what we know about the nature of the executives at Enron and their obsession with compensation through our exploration of The Smartest Guys in the Room, I think that we all could agree that the chances of Enron executives directly complying with this law are…less than the chances of Hell freezing over. My guess is that they would treat this law much like they treated the accounting laws-simply as guidelines to be manipulated with rather than rules. The Enron “entrepreneurial spirit” would be seen as threatened if they could not adequately reward the individuals (both executives and traders) who were responsible for making the company money and driving profits. Therefore, Skilling would likely create another “profit center” (aka scheme) whose sole purpose would be to ensure that Enron’s executives would, in some way, be adequately compensated to ensure ever-increasing levels of personal wealth for the executives. (That’s only to say if Lay’s lobbying efforts in Washington failed first.)
One may argue however, that the behaviors and tendencies of the executives at Enron were the exception rather than the norm. But as was pointed out in our class discussion, it may not simply be the individuals who are in the position of executives in a given company, rather, it’s the nature of the overall beast: the combination human nature and the nature of capitalism. Therefore, former Enron executives would likely not be the only culprits who would attempt to circumvent new compensation regulation.
Back to the first question. In researching this notion, I came across a recent article in the WSJ that confirmed my belief that no, laws on their own restricting executive compensation will not be enough to substantially impact the decades, even centuries, old trend of handsomely rewarding executives. Regarding Obama’s new legislation (officially signed today) to limit compensation of bank executives receiving taxpayer dollars to continue the existence of their companies, the article stated:
“Unfortunately, while this move rightfully punishes yesterday’s fools, it may inadvertently create tomorrow’s culprits. The Treasury Department stated that the pay cap is meant to “ensure that the compensation of top executives in the financial community is closely aligned not only with the interests of shareholders … but with the taxpayers providing assistance to those companies.” If only it were so simple. “The search for ways to get around this,” says one expert on Wall Street compensation, “started within minutes of the announcement.”
The article then goes on to list three ways in which this regulation can already seemingly be circumvented. Great.
As sad as this is, frankly, what else can be done? If we want to wrangle in and rectify the issue of executive compensation, shouldn’t the government have to start somewhere? Although this may be a solid and earnest step in the right direction, I believe the change in this behavior of organizations has to primarily come from within the industry, rather than from outside regulation. Here is where the moral and ethical aspect of compensation enters-which I believe is a part of the solution for this issue.
Luckily, (great for my own peace of mind) I was able to come across a website called Corporate Eye that tracks and provides information about corporate best practices. The article I found on this website provided examples of companies today who are leading the way in executive compensation that takes into account the ethical actions of the executive. Although I was unable to find the specific metrics they used to determine the “ethical-ness” of the executive, I still think that these companies are at the forefront of making the compensation process more legitimate. What is important to note here, is that these companies did not implement these policies as a result of governmental regulations. They evolved, instead, within the bounds of the organization itself (internally or through the influence of key stakeholders). Namely, this spurs internal change on the part of businesses that have the potential to reshape the industry as a whole.
I don’t want to discredit the merit of performance-based compensation, however, because I believe there is much validity in it. I just feel that other factors, such as ethical considerations, should be explored in order to change the method by which executive compensation is calculated and regulated. What do you think? Are regulations alone sufficient? Or, should the practices evolve internally as we learn from previous mistakes?