The issue of excessive executive compensation never seems to go away. Every day's news has a worse story about outrageous CEO pay.

Part of this problem arises from the current hysteria among the Corporate Executive Peer Group. An executive's pay, bonuses, profit sharing, pension and perks are a small percentage of any particular corporation's net profits. The consequence is that no responsible member of the Corporate Executive Peer Group has suggested reasonable bounds for executive compensation. What can you suggest: 1%, 5% of net profit? A percentage doesn't have any logic to it so there are no restraints.
The hysteria will end when logic prevails. Logic says that the harm from excessive executive compensation should be weighed any tangible benefits of better performance.
There are four known harmful effects of excessive executive compensation. None of the material offered to contemporary corporate Boards of Directors or shareholders provides any useful information on any of these four known harmful effects.
The four harmful effects of excessive executive compensation are:

Wage Creep. When executives receive increases in compensation, top management, middle management and all other salaried employees expect and often demand comparable adjustments. The net effect of increases in executive compensation is to raise the cost structure of the corporation. When executive compensation is excessive, the cost structure for the whole corporation can become excessive.
Buyout Vulnerability. When executive compensation is excessive, the corporation becomes more susceptible to being bought out by another corporation.
The reason that excessive executive compensation is an inducement to other businesses and corporate raiders to buy out the company is that the new post-merged company can fire the overpaid executives and immediately have a significant cost saving. This is particularly true in the case where the buying company is foreign and excessive American compensation is easily recognized. The buyout of Chrysler Corporation by Daimler-Benz is an example of this type of wage saving buyout.
Promotes bad employee behavior. When executive compensation is excessive, the corporate executives fail in their leadership role and occasionally employees, suppliers and customers become lax in their own moral behavior. Lower morale is associated with lower productivity, increased in-house fraud and poor work practices.
One authority on the subject of appropriate executive compensation and appropriate employee behavior is the President of the United States who said:
"Everyone in a company should live up to high standards. But the burden of leadership rightly belongs to the chief executive officer. CEOs set the ethical direction for their companies. They set a moral tone by the decisions they make, the respect they show their employees, and their willingness to be held accountable for their actions.
... [O]ne of the principal ways that CEOs set an ethical tone is through their compensation. The pay package sends a clear signal whether a business leader is committed to teamwork or personal enrichment. It tells you whether his principal goal is the creation of wealth for shareholders, or the accumulation of wealth for himself." (July 9, 2002).
Bad form for bad times. Excessive executive compensation sets a bad precedent for employee cooperation in bad times. Almost all businesses experience volatility in their profitability. This is particularly true when the corporation is affected by national business cycles. The example of American Airlines is the best and most recent case. American Airlines had experienced severe reduction in revenue due to industry-wide problems and a business cycle downturn. The management of American had succeeded in reaching agreements with employees to reduce staff and wages ... until the employees learned of deceptive practices involving excessive executive compensation. The staff and wage reductions were then not possible without the resignation of the CEO. Many observers believe the ill will in the American Airlines case will take many years to recover.
Each and all of the four types of harmful effects of excessive executive compensation can be detrimental to the operation and management of a corporation.
There are availabe methods to measure the harm of excessive executive compensation. It is time to start using them.
Implementing metrics: audit groups can rate any corporate executive compensation on a scale from 1 to 10 for each of the four harmful effects.
Strictly as an example, the audit group might determine that Corporation X has a high risk of Type 1 Harmful Effect of Executive Compensation (Wage Creep) with a rating of 8 on a 1-10 scale, but has a lower risk of Type 3 Harmful Effect of Executive Compensation (Promotes Bad Employee Behavior) with a rating of 3 on a 1-10 scale. A combined four category rating can be used to set an executives pay package.
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