Sunday, May 31, 2009

Pay and circumstance. Uproar over bonuses and other compensation for bailed out financial firms, including AIG and Merrill (Bank of America), have prompted a public debate -- exactly what should business folks be paid? More specifically the public discussion has focused on Edward Liddy, the former interim head of AIG. (disclaimer, I am a Liddy fan, and not only because he earned his MBA from George Washington University).

Since some Congress members have suggested executive pay should mirror that of the US President, interest in Presidential pay has also emerged, prompting the business news channel Bloomberg TV to ask, what does it mean to be "Paid like the President?"

I estimated for Bloomberg that the overall direct and indirect compensation for the US President was between US$17 and 24 million (see the entire clip here

I calculated our figure not based on US government figures, although the guided us in several cases, but based on what it would cost someone in the private sector. For example, the cost of hiring a private jet from DC to Chicago costs between $US24K and 60K, but the president travels with 18 people which means he needs two. In another case, we figured the current Real Estate costs in downtown DC was about $32 per square foot, we learned the White House is about 55,000 sq. ft, the Oval Office is 800 sq. ft. You get the idea of how we arrived at this range without me putting you to sleep with a line by line estimate. 

Back to Liddy who was grilled by Congress and made the straw man for the overpaid executive. In my view, this tag is completely off the mark. Liddy, a retired insurance executive, answered the call to public service when the government asked him to pick up the pieces for the failing insurance giant. 

Liddy's pay = US$1.

Your read that right 100 cents. Liddy answered the call, yet became the stomping ground for congressional (very public) outrage over executive bonuses when he approved the executive bonuses (Liddy did not receive any pay, let alone a bonus). With thanks like this, no doubt it will be difficult to find a replacement. Indeed, it may be that Liddy found his job more difficult than he imagined. AIG was more a mess than anyone knew and the complicated financial and organizational structure made things almost unmanagable in my estimation. 

The final analysis is not whether Liddy should be paid $17 million or whether Congressman should receive $1, both of these figures are probably the wrong ones to use. It does suggest however, that public service is different from private sector work, each entails a certain set of responsibilities and each has mechanisms for motivating differently. In my estimation, government imposed salary caps make about as much sense as government sponsored bailouts, but in times like these, sense is not always what gets us moving forward.

1 comment:

Lauren said...

I definitely agree with the consistent debate within the public and private sectors in regards to salaries and bonuses/other compensation. I was over in England when the announcements came out about RBS executive compensation and witnessed firsthand the uproar that it caused. How can a company that lost billions of pounds still afford to give it's executives bonuses? Even after they went through the "voluntary" denial of compensation, the RBS execs still said no. You wonder why the majority of citizens were so irritated with the banking industry and the executives. How does it make any sense that a person and/or persons can essentially run a company into the ground, yet still get paid in millions of pounds? It doesn't make any sense.

It all comes down to accountability within leadership. In my opinion, a true leader admits defeat and/or fault when things don't go according to plan. Granted, the banking crisis probably could not have been avoided, even if we tried; however, CEOs taking responsibility for the outcome would have gone a long way. I have a lot more respect for someone who admits fault and figures out a way to fix the situation. It's not about falling down, but getting back up, learning about what happened and moving forward. Flexibility is key.

I think that this is going to take a lot of time to fix, and finding the appropriate leaders who are willing to fall, but know when to get back up and know when the ask for help.