When Top Executives are overpaid?

As wealth and income disparity becomes a heated topic, it is difficult to find unbiased professional opinion within the fund management community about business executive pay. Since large fund management executives are paid far more than many business executives, fund management companies often become defensive about their own policies. They are responsible to represent a mass of small shareholders. Thomas Piketty brings some philosophical balance to this topic in his book, “Capital in the Twenty-First Century.”

A typical defense strategy among public relations professionals in the fund industry is to shift the topic to salaries of top sports and entertainment figures. However, Piketty identifies the right questions for us to ask. First, upon what criteria is executive compensation determined? Most important, who is making those decisions? Although the colossal earnings of Cristiano Ronaldo and Gareth Bale are already the subject of widespread public criticism, these players are not executives in a highly influential position within the clubs that make decisions on their salaries. The club executives rationally determine the club’s earning potential over the next several years considering player variables. There are solid data determining the financial impact top players will have.

It is seldom clear that a chief executive warrants their compensation based on the results they bring the organization with a unique set of talents. With a form of circular rationale, reputable voices from many segments claim that current levels of executive compensation are necessary to attract the best talent for the firm to be competitive.  The common defense from the fund industry is that a fund’s executive compensation is determined by a board. The additional claim is that corporate governance policies are decided by independent panels. Deborah Hargreaves, director of the High Pay Centre, a lobby group, believes this is “disingenuous”. She says: “If you are a beneficiary of a big package, you tend to be very comfortable with similarly large payments for those you are holding to account. It’s not so much that the decisions are taken separately, but more that they are all part of a cozy club of people who receive high awards and don’t see why that should change.”

In March, David Winters of Wintergreen Advisers, a $2.2bn US fund group began a campaign against Coca-Cola’s plan to award senior management 340 million shares worth $13bn over the next four years. Mr. Winters fears this will “significantly erode the per-share value of Coca-Cola.” He is surprised other asset managers have been less vocal. Mr. Winters is particularly disappointed with Warren Buffett of Birkshire Hathaway. Within a half hour of Coca-Cola’s annual meeting where the pay plan won shareholder approval, Mr. Buffet admitted that he had abstained from voting for the first time since he became a major Coca-Cola shareholder. Mr. Buffet communicated after the vote that he believes the plan is “excessive”. The alternative approach is for influential fund managers to responsibly make a difference that would validate their own compensation in a tangible way.

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