Are CEOs Paid Too Much?

Special to Newsweek

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Problems do, however, emerge when one looks at how companies compute and allocate their bonus pools. Normally, they're divided among participating employees according to how much each contributed to the success of the firm. The intent: to reward good past performance and motivate effort in the future.

But all too often the profits that determine the size of the bonus pool are based on trades that produce short-term returns from taking on more risk. For example, in many firms it was enough to book profits on the short-term difference between the yield on AAA-rated mortgage-related securities and the internal cost of funds. This seemed like free money at the time—until these securities turned out to be extremely toxic. Bonuses were based on assets that were not correctly assessed and on profits that were not real. As it turns out, it isn't really possible to tell what "profits" are except over a longer time horizon.

Attacking bonuses, while appealing, is not helpful. The people who get them may not be heroes, but they aren't villains. Addressing the problems of the compensation system by imposing salary caps, as the new Obama administration has done, is also misguided. The requirement that newly awarded equity grants do not vest before all government money is returned is a step in the right direction. All bonus pools should be based on long-term profits and vested only slowly over time.

But perhaps more important, the administration would be wise to get out of the CEO compensation business. What the federal government should focus on is a revamp of the Securities and Exchange Commission, which needs to do a better job of policing corporate boards and how they handle CEO pay and uphold shareholder interests. With better corporate governance and correctly using Wall Street's bonus traditions, the villains of our economy might one day be heroes.

Gian Luca Clementi is assistant professor of economics and Thomas F. Cooley is the Paganelli-Bull Professor of Economics and dean at the NYU/Stern School of Business. Both are contributors to the new book "Restoring Financial Stability: How To Repair a Failed System."

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Posted By: robojox @ 03/22/2009 5:36:18 AM

i was talked to a director on the board and said that the money paid to CEOs is too high. I was told that my pea brain was too little too understand why they get paid so much and to leave before he called security. I work as a cleaner.
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Posted By: roninfl @ 03/09/2009 9:21:33 AM

"Secondly, CEOs in the FIRE sector tend to receive a larger part of their compensation as stock (usually restricted stock). In actuality, that structure helps wed executives' interests with those of shareholders:

Clearly, this baseless assertion is demonstrably false, as anyone can see by looking at the current situation. All this does is give management incentive to spend their time manipulating their companies stock price instead of, you know, actually running their business.
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Posted By: bulldozer @ 03/08/2009 8:34:53 PM

"OFF WITH THEIR HEADS"
Jail will not be enough for these men. I cannot believe people are not demanding these men PAY UP for their mistakes. These CEO???s are as bad as terrorists. They have robbed us of our 401K???s, our nest eggs. Yet, they can sit on their yacht???s with their plastic surgery overdone wives and ungrateful trust fund kids enjoying the finer things in life on our misery and their $20 million dollar bonuses, on top of their million dollar salaries. WAKE UP AMERICA, AND DEMAND that they be held accountable for their actions, not just by jail. Hit them where it hurts, their wallets. WHAT HAS TO HAPPEN - They should each take their salaries & their bonuses from 2007 & 2008 and divi it up among every American family who made or makes less than $250K a year. That is fair considering American???s are losing their jobs, their homes and can???t even afford a decent meal for themselves or their families. All while these men lie, cheat and steal when we trusted them with our nest eggs and livelihoods. Their combined salaries and bonuses for both 2007 & 2008 total could help millions of American???s out. It???s time WE STAND UP AND DEMAND these CEO???s to pay us back. Why just demand white collar jail that won???t be punishment enough, they need to repay with more than just jail, but also with their wallets.