Executive Compensation: Is This the Countervailing Force?

Washington's bailout may finally take on executive pay.

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Executive compensation is a major bailout issue for many politicians and taxpayers. If we're forking over $700 billion to fix their mistakes, their ability to profit from future gains must be limited.

Earlier this year, I asked Ed Lawler, a professor at University of Southern California's Marshall School of Business and an expert on salary issues, about why outrage over executive pay didn't seem to be changing anything.

His answer:

The problem with executive compensation is that there is no countervailing force. There is nothing really working to hold it down. The outrage that comes out annually as the proxies come out is about the only force that is acting potentially to push it down. There are no shareholder votes. Board members are often CEOs of other companies, and most of them are smart enough to realize that if their neighbor gets a raise, then that raises the overall compensation level for executives.

The other killer is: You don't want to be below market, do you? For your executive comp? You want below-market executives? Of course not. So we've got this never-ending upward spiral of compensation.

One common dilemma is: How do you measure performance? Not surprisingly, executives say: Well, that depends. If there's a downturn, did we go down less than the other guys? And if it's an upturn, maybe I didn't perform quite as well as the other guys, but look at the extra shareholder value that's been created.

Perhaps this Wall Street meltdown and Main Street bailout will provide the countervailing force necessary to limit executive pay.

My colleague Rick Newman, chief business correspondent for U.S.News, says that the bailout could require executives at participating firms to receive bonuses—which make up most of their pay—only "if the company performs well over three or five years—not one—and the execs stay at the company the whole time."

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