Verified Document

Executive Bonuses When The Bush Essay

When he, representing the de facto shareholders the American taxpayers, found the executive compensation plans were out of line with the objectives of said shareholders, he acted. In the free market system, this is the only response. Shareholders have rights and duties as the owners of companies. The executive team acts as their agents. The shareholders have not only the right but the capability to fire boards of directors and by extension executives whose compensation does not match their performance. The public outcry with respect to excessive compensation typically occurs when shareholders neglect their duty. Yet, there are examples where the shareholders have upheld their duty. These firms -- the majority -- do not make headlines, giving the impression that executive compensation is a rampant problem in society. If a company dares to pay bonuses will laying off workers or reducing their wages, the outcry hits the front page. However, the system as a whole is working well.

Arguments based on the pay disparity between executives and rank-and-file are largely emotional in nature. However, they are not entirely without merit. Executive compensation has been to some extent driven higher than it should by the irrational quest for the charismatic leader. Too many firms view executive talent as a genuinely scarce resource, which causes them to overpay top executives (Lagace & Khurana, 2002). Even Mehran (1995) readily admitted that it was not the size of the paycheck that determined managerial performance, but rather its structure. Like all irrational bubbles, however, the bubble that leads to excessive executive compensation will burst. The factors are already in place. The tax incentives on equity-based compensation have been removed and shareholder rights legislation has been improved as well. The rise of the institutional shareholder only heightens the ability of owners to reign in executive salaries and bonuses. Smart owners like Buffett already do.

Models of executive compensation are already shifting. Rational shareholders realize what has already been proven, that returns are lower with high executive compensation that encourages short-term risk...

The free market is founded on the concept of equilibrium -- all markets will trend towards the right price for the good. Executives are no different. The market for executives was subject to investor irrationality and some tax-based distortions. With investors becoming wiser and more rational and the distortions removed, the market for executive talent is now trending towards the equilibrium. The market will set the right price. Boards will understand that compensation packages that reward risk-taking and remove responsibility do not serve the interests of the shareholders. It is already happening at most companies in America. A cap on executive compensation would only serve to introduce another market distortion, and would not adequately address any particular problem other than a public relations one. The market already has genuine solutions that solve the problem of excessive executive compensation. Allowing the market to correct itself is not the most effective way to deal with the problem, it is the only one that can be relied upon to work without introducing any new problems as a result.
Works Cited:

Quijano, E. (2009). Obama tries to stop AIG bonuses. CNN. Retrieved December 3, 2009 from http://edition.cnn.com/2009/POLITICS/03/16/AIG.bonuses/index.html

Mehran, H. (1995). Executive compensation structure, ownership and firm performance. Journal of Financial Economics. Vol. 38 (2), 163-184.

Mullen. E. & Guigliano, G. (2009). Recoverability of equity-based compensation deferred tax assets. Journal of Accountancy. Retrieved December 3, 2009 from http://www.journalofaccountancy.com/Issues/2009/Jan/JanTPC.htm

Lagace, M. & Khurana, R. (2002). The irrational quest for charismatic CEOs. Harvard Business School. Retrieved December 3, 2009 from http://hbswk.hbs.edu/item/3095.html

Sesil, J., Yu, P., Director, S. (2005). Stock option adoption and irrational exuberance: The impact of profitability Working Paper Series in Human Resources Management, Rutgers University. Retrieved December 3, 2009 from http://www.chrs.rutgers.edu/pub_documents/SOProfit010306%5B3%5DF.pdf

Sources used in this document:
Works Cited:

Quijano, E. (2009). Obama tries to stop AIG bonuses. CNN. Retrieved December 3, 2009 from http://edition.cnn.com/2009/POLITICS/03/16/AIG.bonuses/index.html

Mehran, H. (1995). Executive compensation structure, ownership and firm performance. Journal of Financial Economics. Vol. 38 (2), 163-184.

Mullen. E. & Guigliano, G. (2009). Recoverability of equity-based compensation deferred tax assets. Journal of Accountancy. Retrieved December 3, 2009 from http://www.journalofaccountancy.com/Issues/2009/Jan/JanTPC.htm

Lagace, M. & Khurana, R. (2002). The irrational quest for charismatic CEOs. Harvard Business School. Retrieved December 3, 2009 from http://hbswk.hbs.edu/item/3095.html
Sesil, J., Yu, P., Director, S. (2005). Stock option adoption and irrational exuberance: The impact of profitability Working Paper Series in Human Resources Management, Rutgers University. Retrieved December 3, 2009 from http://www.chrs.rutgers.edu/pub_documents/SOProfit010306%5B3%5DF.pdf
Cite this Document:
Copy Bibliography Citation

Related Documents

Managerial Oversight of the U.S.
Words: 1837 Length: 6 Document Type: Thesis

" (Moseley, 1) From a project management standpoint, delegating these funds is a significant concern. The recent history of government financial mismanagement, has caused the public some rightful wariness as these massive bailout plans come to fruition. The Obama Administration must devise a strategy which ensures that these bailout funds are designed to protect American homes, stimulate job creation and help to improve the infrastructural stability of the nation. The administration has the unenviable task of prioritizing the countless

Automotive Bailout
Words: 1279 Length: 4 Document Type: Term Paper

Automotive Bailout: The three major firms in the United States automotive industry asked the government for a bailout worth $34 billion in December 2008 in order to avoid bankruptcy. These companies asked for the bailout from government because their demise could result in approximately 3 million layoffs within a year, a measure that could plunge the American economy further into economic recession. These three major firms in the American automotive industry

Enron & Ethics Enron Ethical
Words: 3604 Length: 11 Document Type: Thesis

From all facts and appearances, those Enron executives gave lip service to ethics, then went on their own way, making as much profit as they could while the company teetered on collapse. One final example from Enron's "Code of Ethics" is titled "Twenty-Twenty Hindsight" which carries its own irony without delving into its points. Lay writes on page 10 that if any employees' security activities or transactions "become the subject

Financial Fraud Fannie Mae Review of Fraud
Words: 1285 Length: 4 Document Type: Case Study

Financial Fraud Fannie Mae Review of Fraud Schemes within Fannie Mae 1998-2004 Scope The agency found the fraud understatements of earnings and illegal gratuities that led to accounting violations and inability to meet Wall Street goals. The investigation of Lee Frakas, executive of a major mortgage company which had dealings with Fannie Mae with hundreds of fake mortgages. The Securities Exchange Commission cited that Fannie Mae had to repay earnings and correct their books

Public Law 110-343 the Crisis
Words: 3082 Length: 7 Document Type: Term Paper

Conclusions -- Was TARP Necessary -- A five member Congressional committee echoed a number of criticisms regarding TARP that many consumers, academics, and fiscal analysts were considering. What exactly was the Treasury's strategy with the $700 billion dollars for the supposed bail out? How can Treasury explain the significant gaps in their ability to find hundreds of billions of taxpayer money? In a nutshell, it appears that the departments that

White Pages: Hydrogen Fuel --
Words: 1400 Length: 4 Document Type: Term Paper

The study advocated a broader energy policy for automobiles, specifically one that allocated more money to the development of gas-electric hybrids. Hydrogen may be the fuel of the future, but it is a distant future, at least fifty years away (Stauffer par. 8-9). In the meantime, the development of proven technology will be of more benefit than hydrogen. The Myriad Issues with Hydrogen: Availability, Extraction, and Storage Are Just the

Sign Up for Unlimited Study Help

Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.

Get Started Now