Monday, June 04, 2007

Executive Pay

Very often we find articles cribbing about how huge is executive pay package, how insane it is when an executive makes so much more than an employed, how pay of executives used to reasonable before etc.

Point is not argue whether the executive pay is sane or insane. Point is to look at different perspectives about the hue and cry about executive pay.

I think like everything else executive pay is also based on risk-reward theory. More the risk, more the reward. Do we know how easy or difficult is to find a job if an executive loses his job for whatever reasons? I guess it is quite difficult. First of all, it is very difficult to down shift. A CEO becoming director is very rare even if the person who has lost his job as  the CEO wants to become a director in a company. Finding another CEO job is also not easy. Many times when a CEO gets booted out chances are he or she is without a job for a fairly long time. I think this does merit some consideration for the huge pay packets and severance these people get. It is similar to why lawyers and doctors are paid so much. It's again the risk and how hard it is to bounce back. A lawyer or a doctor may get embroiled in a messy mal practice suit. Regardless of how the outcome turns out to be, future earning potential of such a professional is greatly reduced. Since reputation is hard to regain in such professions, they command high price for their services to protect themselves from such disasters.

Another reason executives at the very top should get rewarded is for THINKING. As such it gets quite lonely as you move up the ladder. People who can constructively contribute to original thinking at that level is quite small. Most of the people are looking up to a person at the top to set guidelines, motivate them and in short help them to help the organization. Amount of responsibility these people have and amount of THINKING they have to do is enormous. It's a different question if the person at that level is able to think to the extent expected from him or her. Nevertheless, that is the expectation and it does deserve the reward. This also explains why executives as they move up engage the services of high profile executive coaches. It's quite lonely out there.

Thinking is what people are paid for. Pay is in some really odd proportion to thinking. It is like 1 is to 1000. For one unit of thinking, you will get paid 1000 units. For manual labor it may be like 1 is to 1 or may be even lower. For all other professional it may be 1 is to 5 or 10 or 100 depending upon amount of independent thinking  expected.

Another reason to pay for thinking is the fact that ideas are what create value. Not that idea people can alone create value but for every idea person you can have 10 execution people to realize the idea. That itself should be make a point for the enormous leverage you get when you have excellent idea people. Who are excellent idea people? Original thinkers. Imagine having 10 idea people. By the leverage alone, you will need at least another 100 people to realize all their ideas. Add additional people or organize the execution.

The pay for performance follows this order - thinkers, organizers, doers. Thinkers get paid the highest. Organizers around 60% of thinkers. Doers may be 20% of thinkers.


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