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Tuesday, January 2, 2007

Executive Compensation

One omission from your discussion of Executive Compensation (Compensation Experts Offer Ways To Help Curb Executive Salaries, New York Times, Saturday, December 30, 2006) is the establishing of the contribution to success of managers and employees. If CEO compensation is based on firm performance relative to its peers, then everyone in the organization CEO, janitor, research scientist, and assembly line worker has made a contribution to that success. It follows that although there must be big differentials in base pay to reflect the differences in the complexity of the work, there should be no difference is the bonus paid to each individual as a percentage of base pay. Typically top managers receive bonuses of 100% or more of base pay while lower level workers receive about 8% of base pay.

In this way all who contribute to the success of the firm share fully in the rewards. The adoption of this policy as an organizational "best practice" would do much to curb the excesses of present day CEO compensation.

Sent to New York Times, Jan 1, 2007

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