Dear Masters of the Universe, we have some good news and some bad news. The good news is that you were right: capitalism works, and the market eventually self-corrects, reaching a price that more accurately assesses the intrinsic "value" of goods and services. The bad news is that executive compensation has been increasingly overpriced in all industries for decades, and it has only been through the concerted and collective efforts of upper management to fight back the natural tide of normal market forces that it has been preserved.
Is the intrinsic value of an executive at the head of a large corporation truly greater than the engineers, who design new products, or the accountants who manage the flow of capital, or the lawyers who help to protect that corporation's interests? Is the heart more valuable to the body than the brain? Of course not. An executive merely directs the collective action of the teams of talented people beneath them, and allows communication between many disparate parts.
Historically, they have been unduly rewarded because they sit atop the flows of capital, and have been able to divert them in directions that were not necessarily in the best interests of shareholders or the corporation. They filled boards of directors with folks who placed a higher premium on executive compensation than on rewarding shareholders or increasing the competitive ability of the corporation.
Now their performance and utility to the corporation has been revealed as egregiously out of line with their pay. The value that they add to the company relative to their compensation is minor. Their salaries could be better used to enhance corporate productivity for shareholders by investing in other capital. Another half million paid to a single executive will hardly change corporate performance, but hiring five additional top chemists might develop a novel product for your corporation. That capital might be better used to purchase new infrastructure that improves your quality control, preventing future lawsuits.
Perhaps executives are finally learning that just as many employees’ positions were outsourced to other talented people willing to work for less, so too can management.
