Ethics of executive pay limits

As discussed in our last blog, executive compensation is a hot ethical issue at the moment. There's been lots of talk about the ethics of excessive salaries, especially for the Wall Street 'fat cats' and the rogue's gallery of bosses who took home big bonuses whilst their firms went looking for government bailouts in the wake of the financial crisis.

But now we have a new ethical question: what about the solution proposed by Barack Obama this week? Should we applaud Obama's proposal to limit the compensation of all senior executives at any companies receiving 'exceptional' government loans to $500,000? Has Obama's executive 'paydar' hit ethical pay dirt?

The executive pay limit has certainly stirred a lot of debate. On the one side are those that view it as an appropriate response to protect the public interest given the amount of public money that is being pumped into failing companies. Many believe that government's have moral duty to ensure that the taxpayer's money does not simply disappear into the pockets of senior executives. On the other side are those that argue that the pay limit will burden already struggling firms with an inability to attract the best executive talent. As one analyst told Bloomberg Television "No one goes into Wall Street to save the world ... compensation is the motivating factor." These folks tend to think that governments shouldn't interfere in labour markets to 'fix' wages as this leads to unnecessary inefficiencies - and can harm the very industries that the government is seeking to rescue.

From an ethical point of view, and put rather crudely, this is largely a question of principles versus consequences. But given that we're off the page at the moment in terms of the usual 'rules of the game', this is pretty much an ethical free for all. No one really can say for sure what the rights or responsibilities are of governments in situations like this because we haven't got too many precedents to work it all out from. And who knows what the consequences will be when no one is very sure at the moment what's going to happen next anyway. These are uncertain times indeed. One thing we do know though is that if the big threat looming over all this is that Wall Street will lose it's best talent because the grass is, well ... greener elsewhere, then maybe we shouldn't really be all that concerned anyway. After all, executives that have no concern for the public interest, who think that paying themselves bonuses while their employees are being laid off is good management, and who pretty much launched us into the most devastating financial crisis of our times might not be exactly the kind of 'talent' we need right now.

But from our point of view, all this ethical to-ing and fro-ing is probably missing the bigger point anyway. The real issue here is not so much the rights or wrongs of the Obama proposal itself, but the bigger message it is sending about executive compensation and corporate governance. Read between the lines and what the US President is saying is this: 'the system isn't working right, so get your act together and fix it or we'll do it for you - and you won't much like the results if we do'. And it's not just in the US - according to the FT, European governments are beginning to float similar ideas too.

Now, it is unlikely that any of these governments will step further than paycaps in bailed out institutions - after all this is where they have a more direct stake. But the writing is on the wall that they will have their eyes on deeper governance reforms if firms continue to revel in what Obama calls 'shameful' compensation deals. Smart firms and industry bodies, not to mention the more forward thinking think tanks and reformers, should be taking this opportunity to get ahead of the curve and start crafting a new moral direction for corporate governance. The deeper questions about what kinds of success should exec comp be rewarding, and how should this be structured to achieve fair rewards for all stakeholders need to be back on the front burner - and quickly so. Time is of the essence before another dirty bomb gets launched into mangled mess of Wall Street.


Photo copyright David Paul Ohmer. Reproduced under Creative Commons license