Executive Compensation Confrontation: More than Meets the Eye?

As I read this editorial about idiots, I found myself doing something I don’t often do in response to this particular section of my daily business paper: nodding along.

The Wall Street Journal editorial writers hit upon something that had been bothering me for several weeks: the present outrage with executive compensation in the (New York) financial services industry sounds out of tune. The New York comptroller’s report cited as the “pretext for the political outrage” actually showed that the cumulative bonus pool for Wall Street financial services employees posted its biggest decline, 44 percent, in 30 years.

Does that mean that the government should back off because executive pay is back in balance? Of course not. Does it mean that some crucial parts of the executive-compensation debate are being overlooked? I think so.

I believe executive pay became a problem – a huge one on Wall Street, which trickled down to other parts of our economic consciousness – because the debates around the issue (as pay packages metastasized) were either incomplete or inaccurate, or both.

In the past decade, I have debated this issue with a number of extremely smart compensation consultants (contacts who I do not consider to be corrupt, ethically flawed, or practitioners of the Black Arts), and they put forth incredibly convincing arguments about why executive pay levels needed to be high.

These arguments always emphasized “competition.” Yet, their arguments almost always ignored other important terms, like “behavior,” “perception,” and “political reality.”

The executives, board members, and compensation consultants who have approved lush pay packages for the past 15 years had to know that there would be fallout at some point. That’s political reality. They also might have asked what the behavioral ramifications are on CEOs and other executives who receive more money than God. That’s a blind spot that continues to this day: how often do you see “behavior” mentioned in business publications? I see “performance” uttered constantly.

Before my blogging software’s “RAMBLING” warning sounds, I’ll make my point: This sort of debacle will happen again (and again, and again) if we don’t come away with a complete and holistic understanding of what went wrong. That understanding includes insights into the behavioral and organizational impacts of paying select individuals ungodly sums of money, “based on performance” – but, in reality, regardless of whether that performance was strong or weak.