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Are Top Executives Overpaid?

January 24, 2008 08:00 AM
by findingDulcinea Staff
Billions of dollars’ worth of sub-prime losses have not stopped some financial giants from doling out multimillion-dollar severance packages and bonuses.

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Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns are giving out $39 billion in bonuses for 2007 despite posting huge losses in the past year, Bloomberg News reported.

That figure tops the 2006 total of $36 billion in bonuses. However, unlike last year, 2006 was a year of record profits. In 2007, the financial industry posted record losses after the collapse of the sub-prime market. The firms have shed a quarter of their value, announced thousands of job cuts and reduced bonuses for the rank and file.

However, according to MarketWatch’s David Weidner, outgoing CEOs Charles Prince of Citigroup and Stanley O’Neal of Merrill Lynch received generous sendoffs: their severance packages averaged $100 million.

Losses need to be reflected in executive pay, says Raghuram Rajan, a professor at the Graduate School of Business at the University of Chicago. In a Financial Times article that stirred a lot of debate in the press and on the Web, Rajan proposed that the bonuses of underperforming CEOs be recalled, or “clawed back,” to cover the bonuses of employees who did well in 2007.

Reactions to Rajan’s proposal ranged from enthusiastic approval to outright rejection. One commentator taking issue with Rajan writes that the claw-back mechanism will hamper hiring on Wall Street, while The New York Times called the proposal an “interesting theory” but a practical “non-starter.”

Observers have long claimed that executives are overpaid—even in good times. They usually point out the huge gulf between the paychecks of executives and the average workers.

For others, such comparisons are meaningless. Executives shoulder much more responsibility and usually come with degrees from the country’s top universities, writes Fred Whittlesey, chief compensation officer at PayScale. Putting arbitrary caps on executive pay is like putting a ceiling on rock bands’ earnings, he writes.

Headline Links: Bonuses up, economy down

Background: Pain elsewhere on Wall Street

Opinion & Analysis: Executive pay should be cut back


Reference Material: SEC executive pay tool


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