It seems like everyone is talking about excessive executive pay nowadays. Obama is talking about it. Germany's Angela Merkel is reviewing plans to possibly put a cap on executive pay for all of Europe. From the millions that AIG was planning to pay out this year to the hundreds of millions Goldman is actually going to pay. The sums are mind boggling not just for size but more so the for their timing. Wall Street is emerging from their worst days since the great depression. So how is it that anyone is getting any sort of bonus?
Now, in school they taught you that shareholders own the company and have a say on the running of the company. If you are like me I imagined 'investor' to mean regular folk invested through their 401Ks and the like. So how is it that executives increasingly seem to reward themselves ahead of the best interests of the shareholders and therefore the company? Many individual investors have unsuccessfully launched proxy fights to rein in excessive pay or at least match pay to performance.
What my teacher never told me is that the biggest investors are themselves institutions. Therefore your ten shares in a corporation don't matter when institutions own the rest of the shares. These institutions because of their block of shares get to pick the board of directors of your corporation. Then those directors seat on the boards of other institutions and it creates a sort of quid pro quo. Approve my 'guaranteed bonus' and I'll approve yours. Being that all these executives have the same mentality of big payouts no matter the financial results, you have CEOs who end up unsuccessfuly running a corporation for three years of less but walking away with almost $100 million in pay. Huge payout for basically failing. This mentality is also contributing to the shrinking of the middle class when you when entry level positions in these same companies (not Goldman of course, its more like $120K there) start at a paltry $33,000 a year and wages today are still at 1998 levels in real dollar terms.
