What $500K buys you

Posted by Marc Hodak on February 4, 2009 under Executive compensation, Politics | 4 Comments to Read

So, Obama is proposing a $500K cap on executive pay for firms taking bailout money.  What does $500K buy?

In some parts of the country, it can get you a nice house, with a nice yard, in a nice neighborhood.  But it can’t get you a $1 million house.  It can’t get you a $1.5 million house.  You know you can tell the difference.  The location, the views, the acreage, the amenities…a $500,000 house is not the same as a $1.5 million house.  Nobody who is looking at the comparison with eye toward buying can fail to see the difference.  And no matter how well you bargain or cajole or pray, you can’t get a $1.5 million house for $500,000.  You just can’t.

Yet, judging from the popularity of the political clampdown on executive pay, everyone seems to think that either there is no difference between a $500,000 executive and a $1.5 million executive, or we (as co-owners of an enterprise) can get $1.5 million executives for $500,000.

Or, they don’t really think anything at all; they’re running purely on emotion.  “Nobody is worth that much!”  “Nobody needs that much!”  “I don’t want them to make that much using my money!”

A lot of this emotion was stirred up by the big numbers reported in the media, numbers like $20 million, or $60 million, or $20 billion.  But we’re not talking about a $10 million cap in pay; we’re talking about a $500,000 cap.  Lots of senior executives–corporate functional chiefs, division managers of major corporations, not to mention successful traders and asset managers (many of whose assets did not blow up)–make over $1.5 million per year.  These people get paid that much because they are better than $500K managers.  The people making the pay decisions can see it.  The $1.5 million managers are more intelligent, more experienced, more decisive, or more politically savvy than the $500,000 managers.  They get things done more effectively.  They inspire more confidence.  But most people who know they could never buy a $1.5 million house for $500,000 seem perfectly content to believe that a company can simply offer less without any noticeable penalty.

The central lie in this scenario is that Obama and Congress are doing this to protect the taxpayers-as-shareholders.  Well, as a shareholder, I don’t want discount managers running my company.  I don’t want the retention risk associated with grossly underpaying the very people I need to make the kinds of tough decisions these times demand.

Maybe that’s because I’m in the market for executives every day, just as a real estate broker is in the housing market every day.  You see how it works.  You see it’s contours, and imperfections, and messy negotiations.  But in the end, you see it’s a market.  Most people who have been in the market for a home know what I’m talking about when it comes to homes.  Unfortunately, few people have negotiated big pay packages, either as the buyer or seller of executive services, like I have.

For those of you who don’t believe it, please let me take back my portion of this immense investment our government is about to make on my behalf, and let me reallocate it to companies not run by $500,000 managers.