Volume 19, No. 7

 

Executive Pay As Production Input: Surveying The S&P 500 In 2009:  Consider the modern corporation to be a collection of individual minds, intangible assets, financial capital and physical resources. Without another element of production -  management - a corporation is a mere collection of disparate production inputs that don’t do anything on their own. Management essentially breathes life into those assets: acting in the interests of shareholders, it makes those various assets produce profits for shareholders’ benefit.

Markets for production inputs are competitive and open. Utilizing the best physical and intangible resources at the lowest price and finding the cheapest capital are basic managerial tasks in bringing returns to shareholders. Managers are paid to push hard for seeking cost-effective production inputs. Naturally, they’re not of the same cost-containment mindset when it comes to the price of their own compensation - another production input.  The market for the price of management services can hardly be termed “open.” It’s as fair as a Soviet election: annually, shareholders get to approve or disapprove a compensation plan developed by consultants and approved by the board’s compensation committee, a plan built on comparisons to the pay packages of other firms. The only thing shareholders can do is vote against a proposed  plan, but they usually don’t. Occasionally, a “say on pay” vote is allowed, but they’re non-binding and thus, toothless.

If investors thought about the cost of managerial inputs compared to the cost of other production inputs, they might nix proposals on executive compensation plans more often. While investors will concern themselves with the effect of other  costs on profitability, they don’t usually analyze the cost of managers relative to other production inputs. In this report, relevant comparisons are demonstrated. The results show that management compensation is out of proportion compared to other costs that produce shareholder benefits.

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