Does fat-cat compensation make sense? The case for re-alignment...

The Sunday Times has published today an excellent article by Luke Johnson which raises the issue of CEO compensation packages and presents an effective argument for re-alignment.   

Johnson posits that the system involved in setting CEO compensation is designed as a "tails I win, heads I don't lose" proposition given a variety of structural faults, such as remuneration committees staffed by NEDs representing the status quo, a tendency to focus on the "upper quartile", and diffused owners/fund managers whom are insensitive to the issue.  Johnson may be correct.  One of the arguments he makes is that performance in large firms is determined by a broader team, unlike entrepreneurial environments in which the CEO really has a significant impact and carries a much heavier load.  

This article reminds me of another piece of literature in the academic domain by Bebchuk, Fried and Walker (2002), easily accessible on Google Scholar, that makes the case that CEOs have the upper hand in the bargaining game for their own compensation structure and use that effectively to "extract rents" from remuneration committees. The benefit of literature like Johnson's and the like is to remind those involved in incentive systems of this bias when deciding CEO compensation structure.  Check out the Sunday Times article under "Animal Spirits" at http://www.thesundaytimes.co.uk/sto/business/article1530671.ece

Reference: Bebchuk, L., Fried, J. and Walker, D, (2002).  Managerial Power and Rent Extraction in the Design of Executive Compensation.  Harvard Law School Discussion Paper 366. SSRN.

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