Thanks, but I don't want a golden parachute
With options, you have zero value unless the stock price goes up, but with restricted stock, you still have something even if the price goes down. So how do restricted shares align your interests with shareholders'?
Well, there was the theoretical moral hazard issue with options. If all you have is leveraged upside and no downside, you are going to do everything you can to drive the stock price up. It was an inducement to take risks.
So do members of a compensation committee say, "Well, the CEO brought this much value so they ought to get 20 percent or 40 percent of that?"
Absolutely. But it never approaches those levels.
Would it shock you if it did approach those levels?
No. It does approach those levels on Wall Street, which is a perfect example of the tension between capital and labor. You need talented people. They want to get paid for their efforts. And the firm is heavily dependent on those people. So generally they have higher compensation. What people have more of a problem with is circumstances where they believe that the talent isn't as crucial to the enterprise, where there is a windfall aspect to it.
Should we be worried about the fact that executive pay is rising so much faster than wages?
As a broader social matter, what we should be worried about is our ability to create opportunity. If people lose hope of advancement, that generates very serious problems. I think that part of what's created the disparity is that in general it seems to me that the quality of jobs has gone down. In other words, the opportunity to advance is less than it once was. Part of that is because of the transition from manufacturing jobs to more of a service economy. To the extent that you create an even more serious class divergence in America than has existed historically, that tends to generate problems. I think we have to be sure everybody's got opportunity so people don't lose hope that they too can one day generate wealth.
Do you ever get upset that nobody is screaming about Kobe Bryant's pay? Do you think there is a double standard against business people?
People don't think about it analytically as much as they might or should. I think there is a common understanding that if you've got a particular talent you ought to be able to command from the market whatever it is that the market is willing to pay. It is apparent with an athlete because it is so visible and commonly understood that a guy can run a 4.3-second 40-yard dash.
But for executives it is much more subjective. How much is luck?
It is, but ultimately, the proof is in the numbers. If the stock goes up, shareholders do well and executives do well. And if it doesn't, shareholders don't do well and executives don't do especially well, either. One thing that hurts perception is the tax-free payments. Some CEOs have paid no income taxes because the company has paid them. That is egregious. I think grossing people up for excise taxes is fine. But grossing people up for all taxes is a problem. I can understand why people get upset at that.
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