Battle between two ugly human traits

There
is nothing quite like a discussion about executive compensation to
elicit strong opinions - of the informed and uninformed varieties.
Throw in a crisis in the financial markets, an economy in recession,
and a strange alchemy of public and private ownership of businesses,
and you have a good old-fashioned brouhaha.

The most recent controversy surrounds the bonuses paid to American International Group Inc. executives after billions of dollars of taxpayer money had been invested in AIG to keep it solvent. Before that, the issue was the Merrill Lynch & Co. Inc. bonuses paid out "in haste" in December.

At a recent gathering, I raised the issue of the Merrill Lynch
bonuses and got a wide variety of passionate opinions. The fact that a
group of people would have different views on the subject isn't
surprising - but every member of this particular group was a chief
executive officer.

At its extremes, this is a battle between two equally unattractive human traits - greed and jealousy.

Consider greed. A friend of mine was at a Wall Street
investment-banking firm years ago when someone suggested that the
unusually large bonuses to be paid that year might create a public
relations issue. I can't repeat the vulgarities the then-CEO used in
reaction to the suggestion that his $18 million bonus would be
problematic.

Absent the expletives and insults, it went like this:

"It's my money, and I'm going to keep it no matter what anyone says."

His zeal for the issue startled even this room of insiders. The
bonuses were calculated according to an approved formula, but his
insensitivity to the public's potential reaction was, perhaps, a
foreshadowing of the issues we are dealing with now.

Now about jealousy. Begrudging the good fortune of others can be an
almost automatic reaction. Some are unhappy if peers get recognized or
promoted. They are the first to "boo" a highly paid athlete, and they
cannot imagine anyone in business could be worth - pick a number -
$250,000, $1 million, $10 million, $50 million? No explanation will
suffice.

The attitude is unfortunate. Like it or not, our free-market system,
when working properly, provides equality of opportunity, not equality
of outcomes. Productivity and talent are rewarded; jealous complaining
is wasted energy.

What should guide compensation? People should be paid for what their
services are worth on the open market. They are worth the unique value
they bring to the enterprise and its owners.

The problem is that, in public companies, the "owner" is typically a
large pool of relatively disconnected shareholders. They have limited
or no say in compensation matters, other than through their vote for
directors. Executive compensation is set by compensation committees of
the board of directors, who rely on expert consultants to give them
data on what other executives in other companies are being paid. They
award stock options or other equity-participation mechanisms based on
some standard practice.

So the test of comparability is met, but it doesn't always meet the
test of "value added." If the stock price soars, the executive
compensation soars - whether the executive was responsible or not. It's
also true even if the executive took actions to artificially prop up
the stock price at the expense of the long-term financial he

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