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High Salaries and High Dudgeon

The polemic over the ultra-high salaries, remunerations and compensation packages of top managers continues to rage. Over the past 30 years, the multiplier between the least well-paid and most highly paid workers has continued to grow, from roughly 20 – 25 in 1980 to over 500 in 2008. The shining incompetence of many of these top paid executives — particularly in the finance sector– which has brought several venerable financial institutions to the brink of ruin, has put in relief the absurdity of the market’s valuation of these jobs and these executives professional skills.

When last month it was published that the new CEO of ABB had obtained a CHF 19.2 million annual salary, commentators in the press and specialists on governance were scandalized, particularly in view of the climate of economic meltdown, in which the business world was supposed to have learned that such high salaries were based on fictitious metrics of added value. These commentators remark that market principles should dictate that executive compensation falls drastically in a period when profits plummet and there are mass layoffs. Not so, it appears. Rather, there is an enormous discrepancy between the logic and the widely held public opinion, and themarket principles that appear to operate.

While all over the planet companies being helped by governments are being forced to cap salaries, those that have not as of yet need public rescue are also re-thinking their compensation packages. Consultancies specializing in executive compensation have reported a large movement among industry to follow the trend to restructure corporate salary scales after the forced shake-out in executive compensation in the financial / banking sector.

An important factor apparently limiting reform is the global market for CEOs, and consequently their salaries are set as a result of international norms based presumably on supply and demand. The new thinking in the progressive fringe of executive pay reform is to define a base salary relative to the market in which the executive is operating and linking the variable / performance part of the executive’s compensation to such indices as employee satisfaction and the long term development of the business, looking beyond simple short term profits. Clearly, one of the lessons bitterly learned has been that enormous bonus compensation was disbursed based on short term profits which were subsequently revealed to be figments of accounting, vaporizing into staggering losses.

Management schools, academic institutes, government officials and itinerant consultants are now sagely speaking of pay relative to “long term results.” Professors at the University of Lausanne and at IMD have recently made statements about the necessity for judging performance on the long term – that is, over 5 or 10 years.

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