Hate the game

By Tim Louden

Overpaid corporate executives are bad for business. Large bonuses have had implications in a lack of corporate accountability, further economic instability and diminishing returns for the average worker’s salary.

The financial crisis of the late 2000s — colloquially dubbed ‘The Great Recession’ — saw the loss of millions of jobs and homes, and the evaporation of trillions of dollars in household wealth,worldwide. In other words, it was unequivocally a global demographic disaster. 

The deregulated economic policies of the United States were largely blamed. The massive financial institutions collectively known as Wall Street were singled out as the main culprits, but their continued operation was deemed a necessary evil to prevent further economic collapse. In order to accept their continued presence and for recovery to become more than just a buzz word, our duty as a globalized society is to collectively suss out the complex causes and resolutions to prevent a similar catastrophe in the future. How can this daunting task be accomplished? Defending the status quo is not the answer. 

Accountability is not radical; it is a pillar of capitalism. Nevertheless, no senior Wall Street executive has been held criminally responsible for the toxic business practices that led to the financial crisis. To date, not a single senior executive has been arrested or prosecuted for fraud, though the evidence of fraud is overwhelming. In a 2009 hearing before the U.S. Congress, former Federal Reserve chairman Alan Greenspan openly admitted that fraud was rampant in the financial product sector in the years leading up to 2008. Despite no arrests, no indictments, no prosecutions and, by all appearances, no effort by the U.S. government to achieve any of the above, it is a preposterous notion that every single senior executive on Wall Street was merely a victim of circumstance and not a perpetrator. This deplorable lack of accountability isn’t good for business — it’s a mockery of justice and economic stability.

High-paid executives never had their livelihood on the line during the financial crisis. For example, Richard S. Fuld Jr., the former chief executive officer of the now-defunct Lehman Brothers Holdings, maintains a vast personal fortune, despite being at the helm of one of the largest corporate collapses in history. In fact, the opposite is often true, as the ratio of top executive compensation to working and middle class salaries have continued to rise since the 1970s. According to an article by the CBC in 2012, top Canadian executives earn up to 189 times the average full-time wage. A Wall Street Journal article from last year reported that in the U.S. the ratio may be as high as 380 times the average worker’s compensation. This income disparity serves to insulate top executives from high-risk business ventures and the effects of a recession, while leaving the stagnating middle class comparatively more vulnerable.

Executive pay regulation is not a punishment, but an insurance policy against high-risk ventures that have major social ramifications. Enacting regulatory controls such as bonus caps, shareholder say-on-pay votes and bonus-malus payment structures are important safeguards to future economic stability. 

The European Union certainly agrees, because last year government officials in the EU reached an accord to cap banking executive bonuses at a maximum of twice their annual salary. In 2008, Switzerland’s largest bank, UBS AG, instituted a bonus-malus pay structure for board members — bonuses are held in escrow and executives may even be penalized to discourage risky short-term ventures. Additionally, a 2010 study by the Institute for Strategy and Business Economics at the University of Zurich offered insights from the salary capping structures of major sports leagues to the business sector. A modified version of the capping and luxury tax system that is used by the NHL, NBA, NFL and MLB may increase both competition and productivity by more closely tying compensation to performance.

The recession was not a force of nature. It cannot be seen as simply an unavoidable cost of doing business. It was a failure by multiple sectors in multiple countries that continues to disproportionately affect the segments of society with the least amount of power. Executive pay regulation is not a scheme to redistribute the wealth away from the ‘haves’ to the ‘have-nots’. It is a system of checks and balances on the power held by corporations. 

Reducing the discussion on corporate regulation to conveniently simple lemonade analogies obfuscates the issues at best and paves the way to future catastrophe at worst. In short, the anti-business sentiment will continue to linger until the effects of the financial crisis have been reconciled.

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