Monday, December 13, 2004

executive compensation

Kevin Drum lists a number of reasons that executive compensation keeps rising. He could add to the list the common wisdom that good executive performance requires that executives identify their companies' interests with their own. Once executives become wealthy, it requires ever more compensation to achieve this alignment of interests. In many cases, companies go back to shareholders time and again asking for increased equity compensation in order to 'retain key employees,' then spend it increasing the stake of executives who are already major shareholders. This inflates the salaries of high-profile executives and feeds back into the "everyone's above average" spiral.

Perhaps the most pernicious aspect is that the equation often ends up reversing. Having been told for years that good corporate governance requires that CEOs equate the company's prospects as their own, CEOs can be tempted to conclude that anything good for them is in fact good for the company. Even if that temptation never rises to conscious action, it can influence decisions.

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