June 12, 2009 | Refinancing

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Audio Debate: Are Executives Paid Too Much?

June 12th, 2009

Arguments over executive compensation typically pit populism (“The kind of money these jerks make is obscene!”) against pragmatism (“Financial incentives for individuals are the best way to create value for the entire organization”). But do executive pay schemes, at least as currently structured, in fact work in the best interest of companies and their shareholders, not to mention the economy and society?

That’s the subject of the current HBR Debate: How to Fix Executive Pay. The first two experts to post their arguments–Ira Kay and Anne Sheehan–engage in some real-time verbal sparring on that issue in this moderated debate.

Kay, global practice director of executive compensation consulting at Watson Wyatt Worldwide, argues that, contrary to conventional wisdom, the current system isn’t inherently flawed. There is no evidence that it led to excessive risk-taking among top executives or in some other way contributed to the economic crisis, he says. Executive pay goes down as well as up, and in the past year has actually fallen farther than the stock market. The perception of the problem is fueled by peripheral issues, such as overly generous severance packages, that companies should eliminate because they tend to serve as rallying cries for shareholders, employees, and other critics.

Sheehan, director of corporate governance for the California State Teachers’ Retirement System, a major investor in many public companies, says that the outrage over executive compensation signifies deeper problems with the system and a loss of trust in business that could create a dangerous backlash. She says companies need to, among other things, give shareholders a “say on pay” and better explain to shareholders and the public the whats, whys, and hows of senior executive compensation schemes. This transparency will help curb financial incentives that can push executives to maximize short-term financial performance at the expense of long-term value.

The debate is civil, but Kay and Sheehan do have a few choice words for one another as they expand upon their written arguments and grapple with one of today’s most emotionally loaded business issues.

Listen to their arguments and then weigh in with what you think below.

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