AN EXPERT’S VIEW ON EXECUTIVE PAY: A MINUTE WITH RUTH V. AGUILERA
The U.S. government has joined the growing outcry over earnings of top executives, ordering deep pay cuts at seven big firms that have yet to pay back bailout cash. Business professor Ruth V. Aguilera, an expert on comparative corporate governance and a fellow at the Center for Professional Responsibility in Business and Society, discusses the recession-fueled unrest over wages and bonuses in an interview with News Bureau Business & Law Editor Jan Dennis.
In general, are top corporate executives overpaid or does their generous compensation merely reflect the norms of the fields in which they work?
In general, they are immensely overpaid. In fact, it has gotten out of line. How did we get there? Global competition for managerial talent (even some large publicly traded European firms are run by foreign CEOs who demand American-style compensation packages), private-equity funds willing to pay high stakes to retain executives in acquired firms, short-term incentives tied to ever increasing lucrative options, and savvy compensation consultants. It is particularly problematic because there is not always a clear link in the compensation research between long-term firm performance and pay. The agency incentives developed to align shareholder and managerial interests have backfired in an overvalued stock market that made options short-term drivers of risk and excess.
The problem with executive pay is that both the structure and level of pay have to change. The structure involves paying for good sustainable performance and not just performance (in other words, quite often executives are paid to make deals without really looking at whether these were in fact successful deals). The level of pay has unfortunately been driven up by a growing industry of “compensation consultants” who more often than not pay at artificial market prices