Lots of conversation yesterday about President Obama’s $500,000 cap on senior executive pay for the distressed financial institutions receiving bailout money. While I try most of the time to keep my political opinions to myself, I must say this decision needed to be made. And, not just because of the stupid stuff we read about spa trips, corporate jets, and Las Vegas Junkets.
What happened here was not an emotional decision. It was a business decision.
Here’s an example. A company finds themselves in financial difficulty (for whatever reason). Bottom line, they need money to survive. They go to another entity and ask for money; and they give it to them. Now, this other entity isn’t kindly rich Uncle Joe. Remember what we’re talking about here…this is a b-a-i-l-o-u-t. Is the entity providing the money entitled to put some conditions (or strings) on that money? Sure they are. Could one of those be that the company president takes a cut in pay until the company is healthy again? You betcha.
What happened here is no different. Companies came to the Government (read: you and me) and asked for money. The Government (again: you and me) said OK…but there are strings attached. And one of those strings is executive compensation.
Critics of the President’s decision have said this edict could discourage participation in the economic recovery. They’ve also argued it could set a precedent that undermines performance-based pay.
As I’ve said before, compensation is driven by three things: (1) the company’s ability to find talent, (2) the company’s ability to retain talent, and (3) the company’s ability to pay.
So, if Barack Obama was willing to become the President of the United States (with a annual salary of $400,000) and commit himself to fixing our country’s economic mess, then I’d like to think there are a few CEOs out there who would commit themselves to fixing a single company for a half-million dollars. (Driver #1)
Regarding Driver #2 (retaining talent), some people might argue that the current performance of the executives in question got us into this mess and their retention is not necessarily a good thing. (Note to self: write a post someday on good turnover.)
Also, let’s not forget that these executives are still able to receive stock options. And, if they actually hang around and make the company healthy again, they can exercise those options for a pretty huge chunk of change. And there will undoubtedly be a slew of book deals and speaking engagements in their future (aka pay for performance).
Lastly, the most important component to compensation…the company’s ability to pay (Driver #3). If a company has to ask for bailout money, isn’t it obvious that their ability to pay is questionable?
As a human resources professional, I don’t believe this is a permanent solution. But as a business person, it is a sound and necessary solution that emphasizes leadership and financial accountability. And I’m all for that.