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Chap 1 WSJ Pay Police

Chap 1 WSJ Pay Police - MANAGEMENT WSJ.COM October 10th...

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MANAGEMENT OCTOBER 10, 2009 WSJ.COM October 10 th , 2009 Keeping the Pay Police at Bay Having Uncle Sam set executive compensation is unnecessary and unworkable. David Yermack on how companies could strengthen their own checks and balances. By DAVID YERMACK As politicians struggle to repair damage from the 2008 financial crisis, they are fixating on a dubious target: executive pay. Behind every bankruptcy, bubble or bailout, somebody has spun out a theory about incentives gone awry. The obsession was on display just yesterday, when Citigroup agreed to sell its lucrative Phibro oil-and-gas trading business, where its chief had negotiated a contract that required the giant bank to pay him nearly $100 million in compensation for 2008. Federal regulators told Citigroup, which had received a large infusion of government aid, to either renegotiate the contract or sell the unit. Executive Pay The past year has provided a bevy of sideshows. When auto executives sought a massive bailout of their industry last fall, they were excoriated for having generous aircraft perquisites. In March Congress stopped all work for several days, making time for politicians to denounce bonus payments to midlevel employees of American International Group. In New York, state Attorney General Andrew Cuomo has kept his name in the news all year by publicizing compensation practices at Bank of America and Merrill Lynch. At the G20 summit two weeks ago, important world-wide problems got shunted aside so that President Barack Obama and other national leaders could talk about executive pay. Executive compensation ranks far down the list of our society's economic challenges, which include unemployment, scarce credit and protectionism. Reform proposals from Congress, the White House and the Federal Reserve are unworkable and, in some key areas, conflict with one another. People have lost all sense of perspective. In most companies executive pay works rationally and effectively. No evidence whatsoever indicates that errant executive compensation "caused" the financial crisis of 2008, or that its reduction would prevent similar events in the future. The recent scrutiny of executive pay seems to stem from an odd mix of envy and vengeance, unsupported by facts or theories. While witch hunts might be fun, they're not efficient, and they can divert everyone's attention from the real problems at hand. If Mr. Cuomo becomes distracted it might not matter, but when executive pay begins to preoccupy Mr. Obama, French President Nicolas Sarkozy, U.K. Prime Minister Gordon Brown, and German Chancellor Angela Merkel, it's time for the circus to stop. There's certainly room to improve how we motivate and reward our corporate leaders, but for most companies the current system works pretty well. Our business leaders, even those in the financial industry, already have stiff pay-for-performance incentives. Their contracts reward them for taking risk, but hold out the possibility of severe penalties if they over-reach.
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