Those ever-so-popular executive compensation packages have been in the news quite a bit lately thanks to President Obama’s decision to force companies to limit the amount of money they give to bank executives if that bank gets a bailout check. I think it’s a bad idea for companies or the government to limit executive pay (although I may be the only one), and here’s why.
So Long, Suckers
Think about this. Imagine that you are one of those highly-paid executives, and your company suddenly adopts a plan that will limit your pay. Now you have a choice. You can either stay at your current job and get less pay, or you can move to a company down the road that would love to get your skills working for them (and they will be paying a premium for your services). What are you going to do? We both know that you’re going to move to the new company for more pay. Why would you expect an executive to do anything different?
You Get What You Pay For
If you want a good, top-shelf executive to run your company, you are going to have to pay for one. Consider this example: when Ben and Jerry’s were looking for a new CEO back in the 90s, there was a salary cap imposed on the current executive’s pay. After a widely publicized “open to the public” search for a new CEO, the company ended up using an executive search firm to find a new manager. And guess what? No salary cap was forced on the new CEO, because the company knew they wouldn’t find a qualified individual that was willing to work for so little.
Not Too Shabby
At one time, I was very angry when I heard about a CEO making a $5 million bonus if the company lost $10 million for the year. I wondered at the audacity of those executives to gladly take a fat check when the company ended up in worse shape than when the year began. Then I figured something out about how those bonuses work. For instance, what if the company would have lost $20 million without the guidance and leadership of the CEO? In this scenario, the CEO saved the company $10 million. A $5 million bonus for saving the company twice as much money is a great deal for both the company and the CEO.
If, after reading these points, you are still unconvinced, then please us know why in the comments. Remember that professional athletes and movie stars make quite a bit more than most business executives, but there is no outcry about that. If you have a well-reasoned argument, we’d love to hear it!
This is a guest post by Ben Eubanks.