Wednesday, February 29, 2012

CEO Compensation Revisited

An interesting article in USA Today discusses the incredible difference between Japanese executive compensation and its American counterpart. Basically 809,000 versus more than 11 million. Sheesh.

This article goes into it in depth:

But I want to draw your attention to a quote that defines the whole situation for me …

But other experts say there's a reason the Japanese management model fell from favor after Japan entered a long economic slump at the beginning of the 1990s: Japanese compensation packages don't give CEOs much incentive to look out for shareholders — the people who own the firm. No wonder Japanese firms are typically about half as profitable as U.S. firms, according to the Japanese government.

"I emphatically don't think U.S. firms should adopt Japanese-style compensation plans," says Brian Heywood, whose firm invests in Japanese companies. "In general, I do not believe that the current Japanese compensation system aligns management with shareholders effectively."

This extreme emphasis on shareholder value started in the 1980’s and has continued until today. The article discusses the short term thinking that this breeds and I have mentioned in the past that I consider the shareholder value thing to be in some small part a clever ploy to pander to the people who vote on executive compensation. It becomes a circle jerk that results in unreasonable excesses for the executive class, basically increasing the wealth of a tiny percentage of participants at the direct expense of those below.

But here is the real kicker … to say that it is a huge flaw that Japanese companies are less profitable than their American counterparts is, of course, focused only on the concerns of the rich. Those who benefit from excess compensation. Yet we as consumers buy Japanese cars, Japanese cameras, and Japanese electronics in preference to American equivalents (if they even exist any more) by a huge margin. If the Japanese started making everything, I suspect there would be no manufacturing left in North America in a decade or two …

It’s about quality and longevity … the corporatist way has proven to be hugely flawed where both are concerned …