Are Executives Worth It?

Abstract Many people question whether executives are overpaid or whether they actually earn the high salaries and bonuses reported in the popular press. Whether they are overpaid or fairly paid has little to do with the absolute size of the compensation package and everything to do with the way the compensation package is determined Compensation based on the ability to "attract and retain" does not ensure value is being created and shareholders being rewarded. Executive compensation should instead be tied directly to a value creation measure such as Economic Value Added. It is only when this connection is enforced through the compensation strategy that shareholders can be assured that executives are indeed "worth it". Many people already have an immediate answer to this question, despite the fact the question as posed is really quite meaningless. The question of "Are executives worth it?' is about as capable of being answered rationally as the question "How long is a piece of string". The only difference apparently is that most people have fewer strongly held opinions on string than they do on executive salaries. Judging by the absolute glee with which large executive salaries are generally reported by the popular press, this observation is not lost on your average journalist. How likely is it we would ever see a headline like: Acme Corporation revealed today, they have in their possession piece of string 8 miles long. A company spokesman was quoted as saying, "We believe an 8 milelong piece of string is a reasonable length for a company of Acme's size. Although 8 miles is lot of string we are aware of many smaller companies who possess even longer strings and we feel compelled to remain competitive." I think we can all agree that on at least one level, 8 miles is a heck of a lot of string. After all, who really needs a piece of string that long. However without a frame of reference we have no way of determining whether it is too much or too little. My aim in this paper is to develop a basic framework that can be used to separate emotional arguments from logical ones and that can be used as a basis for a reasonable approach to executive compensation. "I don't know much about art, but I know what I like". This approach may get us through an art gallery opening with our ego intact, but is a dangerous strategy at an art auction at Sotheby's. Similarly we cannot rely on "instinct" to assess executive compensation, secure in the belief we will somehow know when it is right because it is too easy for emotional responses to affect our judgment. compensation framework is with something similar to a mission statement. If asked to describe the purpose of an executive compensation strategy, companies generally respond along one of two lines. "The purpose of the compensation strategy is to attract and retain top quality talent". or "The purpose of the compensation strategy is to enhance shareholder value".