Dumb and Dumber Executive Pay

Well, here we go again. The 2009 Great Recession has people looking for places to assign blame, and so the subject of excessive executive pay is in the spotlight. President Obama, Congress, labor union leaders, and some in the media are illuminating the miscalculations and greed of organizations that took excessive risk and assumed that our overheated economy would last forever—and then continued to pay the executives of these failed companies obnoxious amounts of money for their misfires (costing shareholders billions of dollars in value).

Most of the blame is being assigned to the CEOs of these firms. But I am having a tough time figuring out whether the blame lies with dumb executives who felt they didn’t need to deliver performance equal to their pay, or if it lies with their dumber boards of directors for allowing these executives to benefit while shareholder value was eroding. The truth is the blame lies with both.

For example, take a look at the compensation of the former CEOs of three financial firms that went into the toilet last year:

• Angelo Mozilo, Countrywide Financial, $102.8 million

• Lloyd Blankfein, Goldman Sachs Group, $73.7 million

• Richard Fuld, Jr., Lehman Brothers, $71.9 million

Do these extreme amounts bear any relation to their performance? No. That level of compensation was just dumb.

And I’m not alone in this opinion. In Warren Buffett’s 2005 letter to shareholders, he said, “Too often executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre or worse CEO—aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet & Bingo—all too often receives gobs of money from an ill-designed compensation arrangement.”

Now, I want to make it clear that I believe in a free market system where individuals should have the opportunity to earn as much money as is appropriate for achieving exceptional results, but not if only one member of the team gets all the reward for doing so. Let’s compare the ratios of the average CEO pay to the average worker’s pay through the years. In 1980, the ratio was 42:1. By 1990, the disparity grew to 107:1. By 2005, it mushroomed to 411:1. In the past few years, the ratio has decreased slightly, in part because the value of stock options has decreased. But there is still a major problem with the executive pay culture in American corporations—a situation that I will hereinafter refer to as “America’s Dumb and Dumber Executive Pay Culture.”