In the past year or two, there have been many reports about the salary and bonus of Wall Street executives, and the debate about their salary level shows no signs of cooling down. For many people, the most interesting question is whether the government should supervise the compensation of executives in financial services.
John, a professor of accounting at Wharton Business School? John Cole and Wayne? Wayne Guay has just finished writing an article on this issue, entitled "Is it appropriate to regulate the salary of the financial services industry?" (Is there any reason to supervise the executive compensation of the financial services industry? ) paper. Although Cole can't accept our interview, Wharton Knowledge Online is fortunate to have Gay and colleague Chris? Chris Armstrong to discuss executive compensation in today's business environment.
Wayne? Guy:
I'm glad to be here for an interview. This is my paper for the seminar held by Wharton Business School. The theme of this seminar is the future of finance after the crash.
As many people know, some time last year, people raised many regulatory issues and put forward many regulatory measures around the compensation of corporate executives. These measures are not limited to the field of financial services, but cover a wider range. In this paper, we try to look at the issue of executive compensation in a certain background and compare the situation of financial services with other industries. Therefore, we have studied a series of schemes of salary supervision point by point, and discussed the advantages and disadvantages of these schemes.
In this paper, you conclude that there is no reason for people to supervise the executive compensation in the financial services industry. There are two reasons for this conclusion. First, the general principles advocated by regulators have been implemented in many such companies; Second, because the suggestions made by regulators and others may not meet their expected goals. Wayne, can you talk about it? Guy: I need to make it clear that this paper was written by John, an accounting professor and me? Cole cooperated. He also teaches at Wharton Business School. Of course, we don't want people to think that our view is that executive compensation doesn't need supervision at all, and executive compensation in financial services doesn't need supervision at all. Our view is that in terms of executive compensation, most enterprises have followed the general principles strongly advocated by regulators and others in many cases. I think there is still room for improvement in these general principles, and there is always room for further improvement. Some suggestions made are a step in the right direction.
In our opinion, some proposals seem reluctant to carry out major reforms. Our view on this issue is: actions need to be very cautious, and we must realize that compensation practice has been evolving in many industries and enterprises for decades. We have every reason to agree to some proposals. I think it is wrong to abandon everything. We should keep those good things and make some reforms instead of throwing everything away.
Chris? Armstrong:
Yes, their conclusion is reasonable. I think the author made a good argument. They read the suggestions one by one. Generally speaking, I agree with most of their conclusions.
Wayne, you mentioned Treasury Secretary Timothy in your paper? Tim Geithner made five suggestions. He talked about the necessity of better unifying salary practice with shareholders' interests. In addition, salary practice should promote the stability of various financial institutions and the stability of the whole financial system. I want to talk about two points: the first point is that the salary scheme should be able to correctly measure performance and reward and punish performance; The second point is that the compensation plan should be unified with perfect risk management. Let's talk about these two aspects. Do you think most financial institutions, most institutions on Wall Street are doing this now? Guy: Yes. I think there is a general idea that these enterprises have not implemented performance pay at all, and most of them have not linked salary to performance. But if you look at the data and objectively look at the data, you can find that these data prove that a large number of enterprises are implementing performance pay. In fact, if you compare the compensation system in the United States with the executive compensation plans in other countries around the world, you will find that the compensation plan in the United States is much more closely related to performance than in other countries.
Specifically, in this paper, in view of the situation of financial services, we ask such a question: Is there a significant difference between the salary of banks and that of executives in other industries? We really didn't find much difference between them. Therefore, it is meaningless if people want to use an argument to oppose the payment method of bank executives in financial services. We have not found any particularity in the salary practice of this industry.
Armstrong:
Let me say a few words briefly. I think the term performance pay can mislead people. The author of this paper points out that we should pay attention to the change of wealth as the basis of incentive measures, and also pay attention to the annual income, that is, the CEO's salary. These salaries may not be sensitive to company performance, but their entire stock portfolio is very sensitive to company performance. The change of portfolio value represents the real change of CEO wealth.
Armstrong:
Yes, the value of his portfolio will also decrease.
This is a blow to him or her.
Guy: I agree with Chris. This is also one of the most serious misunderstandings about performance pay. People often pay attention to the CEO's annual bonus or their salary, and then exclaim, man, the company's performance this year is not very good. I don't think their bonus should be reduced so much. It seems that salary is not paid according to performance at all. However, what people don't notice when making this judgment is that the CEO may hold tens of millions of dollars worth of stocks and options that the organization requires him to hold. If a company's share price falls by 30% or 50% or more, then his personal wealth will also shrink greatly. This is where he suffered heavy losses.
In addition, we should also realize that, to a great extent, the focus of performance pay is to motivate enterprise executives. I think people are emotional about performance-based pay. When you see pay by performance, you will immediately think of rewards and punishments. We really should reward or punish them according to their performance. However, unless these rewards and punishments can motivate enterprise executives to work better, the shareholders of the enterprise don't care much about these rewards and punishments. Therefore, in order to fully grasp the connotation of performance pay and reward and punishment practice, we should carefully think about such a question: Do corporate executives have the motivation to work for the best interests of shareholders? What motivates this kind of motivation is the stocks and options of enterprises, that is, all the equity gains accumulated by enterprise executives over a period of time.
Wayne, in the introduction of this paper, you talked about the debate about executive compensation, which has been going on for decades, not only for financial institutions, but also for all American companies. However, as we all know, it was not until recently 18 months to 24 months that this controversy came to the fore because of the disaster on Wall Street and public protests against CEO's salary and bonus. In my opinion, taxpayers, politicians and others disagree with their salary levels because, in the words of officials of the Ministry of Finance, the leaders of these institutions almost caused the collapse of the global financial system. Although they are involved in such irresponsible behavior, why can they still earn $5 million a year, 1 10 million or even 1 15 million? Do you think people are asking a reasonable question? Guy: I think there are a few points to be clarified here. There is no doubt that the CEO's salary attracts people's attention because it is a large sum of money and does not need to be avoided. The CEO of a big company does earn a lot of money and his salary is really high. However, this fact alone cannot tell us whether the CEO's salary is too high. Many professionals earn a lot of money. For example, doctors, lawyers, hedge fund managers, actors and musicians are all well paid. Therefore, in order to treat their salary correctly, we need a benchmark. What do you think is the benchmark of a CEO's appropriate income level? In this paper, we try to put forward several benchmarks for comparison.
One point that we have raised, which is also mentioned by many authors, is that the salary level of CEO will rise with the increase of the scale of the organization they operate. Because the scale of enterprises has been increasing, the salary of enterprise executives is also rising, because it is much more difficult to run a very complex global organization. In addition, we also try to examine the salary level of hedge fund managers and private equity fund managers in the context of their salary level. Their salary practices are not regulated and shareholders will not interfere in the process of determining their salary. In addition, we also try to examine the salary level of American corporate executives according to the salary level of the world and other countries. In this paper, we also put forward various arguments why it is not clear whether the salary level is completely out of control. However, at the same time, we have not evaded the fact that executive compensation has indeed attracted widespread attention. The fact that the income gap between the highest income group and ordinary workers has been widening has aroused widespread concern. Maybe people should really pay attention to this. However, the question we should seriously consider is how we should respond to this.
Judging by common sense, is the CEO's salary too large? What do you think of this? In this paper, your focus is on financial institutions, but the annual income of CEOs of non-financial institutions can sometimes be as high as 50 million or even 60 million US dollars. These figures have been lingering in the minds of ordinary people, who feel that even on the surface, such a large number is difficult to understand, because, as you just mentioned, the ratio of CEO's income to workers' income has soared in recent years. Chris, can you talk about this problem briefly?
Armstrong:
At first glance, their salary is indeed a considerable figure, but if you calm down and think objectively and think about the decisions made by these executives, you will find that these decisions will bring tens of millions, hundreds of millions or even billions of dollars to shareholders. So from this perspective, their wages are only a small part of the value they may create, and in some cases, they are also a small part of the value they destroy. Wages are really small compared with the value they create.
Does the change of salary convention in recent years reflect people's concern that CEO's salary may be too high in some cases? Guy: There is no doubt that the CEO's salary has not decreased in the last twenty years. In fact, as we mentioned in the paper, their salary level has increased. In the last two years, their salary level has declined, partly because of the poor performance of many enterprises, including financial services institutions and enterprises in other industries. However, the degree of salary change in this period is not as significant as the changes in salary structure, salary transparency and salary determination procedures. If we think that the CEO's salary is too high, then we will naturally think of a question: Why? One of the reasons commonly put forward by people is that there are defects in the procedure of determining remuneration by the company's board of directors, the board of directors has no influence independent of the CEO, and the CEO's position in the board of directors is unshakable. They manipulate the board of directors and the CEO decides the salary level for himself. Therefore, this program is not an independent operating program.
However, I believe that the salary determination procedure is just 10 or a link that has made great progress in the past 20 years. To a large extent, the board of directors is independent, and their independence is much higher now than it was 20 years ago. The remuneration committee is completely independent. The number of suggestions received by the board of directors from external consultants and other places has been increasing, and benchmark evaluation has become more common. In addition, the openness and transparency of the work of the board of directors have also been significantly improved. Although so many changes have taken place, we have not seen the CEO's salary level decline. Therefore, my interpretation of this result is that in fact, the procedure for determining the salary is not the cause of the salary problem. Although this program has been getting better and better, we have not seen the result of the decline in salary level. Therefore, in my opinion, the wage level is largely determined by market forces, not by flawed procedures.