Tuesday, November 26, 2002

Wrapping up exec compensation

Many people have written in about executive compensation, insisting that CEOs are paid way too much and that CEO pay should be even more closely tied to performance. I point out that since CEOs (like almost all of us) are risk averse, tying their pay more closely to performance will result in even higher pay on average since they will have to be compensated for the extra risk.

For example, I would take a $100,000/year job over a job which would pay me $200,000 or $0 with equal probability. Force people to take on even more risk, they're going to hold out for a higher salary. So you can hold out for lower pay, or better incentives, but not both. As a shareholder, I vote for better incentives.

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