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Economic Review

4/06/09

The pendulum of power seems to be swinging the other way…but is it a good thing?

Over the past couple of decades or so executive compensation for major corporate leaders has grown significantly, and when comparing the amounts awarded to CEOs to that of the average worker for an organization, the differential has simply diverged in an explosive, excessive manner.  Compensation in the form of outright equity, equity options, monetary bonuses and outright salaries has soared to exorbitant levels.  Last week the media covered this issue in colorful fashion as it analyzed compensation for CEOs of some prominent corporations.  The amount of total compensation tended to drop for these select CEOs from 2007 to 2008, however total numbers still ranged in the 15 million US$ zone.  This compensation is in the face of those companies laying off hundreds and even thousands of workers.  The pendulum of power seems to have swung excessively in the direction of corporate leaders; however, the Obama administration may have begun to pull the pendulum back towards government. 

This reverse in the pendulum of power was depicted in the recent battle with AIG to halt bonuses to select individuals and further illustrated by the ousting of the CEO of GM last week as a stipulation for bailout money.  Given the horrendous corporate performance over the past year, where the result is required bailout funds for a number of companies across industry sectors, the US government has now pursued a policy of strings attached with those funds.  In light of bonus payouts in companies that performed so poorly that they would have gone bankrupt if not for government bailout money, the change in direction of the pendulum is probably not a bad thing...that is, unless the power shift swings too far.

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