The Problem of Executive Pay

As the financial tsunami continues to unfold on Wall Street, a big question remains: what to do about executive pay? There are many schemes ranging from absolute caps to complex structural formulae. The bottom line is simple; at some point executives must be paid for actual performance, according to The International Herald Tribune.

Both major presidential candidates have cited the “heads-I-win, tails-you-lose” schemes as being a major factor in the decline and downfall of the financial system. Most Americans and many other experts agree with that sentiment. But the problem remains of how to properly deal with the issue.

Raghuram Rajan, a professor of finance at the Graduate School of Business at the University of Chicago believes that the banks and investment firms should have a choice: Either they accept a strictly enforced government cap on wages ($250,000 and $500,000 per year have been floated as possibilities) or they enact guidelines that make current and former executives much more susceptible to risk and losses.

Under our current system it is possible for executives of firms that are losing market value and hard assets to rake in tens of millions of dollars in annual compensation. Steve Schwarzman of The Blackstone Group was paid an astounding $350.7 million in 2007, Pete Peterson also of Blackstone was paid $174.3 million during the same time period. Their company has seen its market value drop 60 percent in the last year, representing billions in losses, yet they walked away with nearly half a billion in salary and bonuses.

It is beyond comprehension that either of them put in the kind of hard work and dedication necessary to command a salary large enough to purchase an island nation. To make matters worse, as their company faltered and cut jobs to offset operation costs, the average salary of all executives continued to rise.

The median household income in the United States (usually more than one wage earner) varies greatly from one state to the next, but generally hovers around $50,000 per year. The average executive of a company listed on the Standard & Poor’s 500 index made roughly $14.2 million in 2007. The fact that executive households can expect to bring in 300 times more than their employees is alarming and destabilizing.

Too much power and too much money are put into the hands of individuals who generally can in no way have earned such exorbitant sums. Gregg Easterbrook, a noted author, writer, editor and lecturer, has railed against the mystique of executive pay scales many times in his various writings. It is time that the American people started to take notice and call on their leaders and representatives (whomever they may be come November 5, 2008) to regulate this out of control sect of the economy.

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