Executives Deserve to Be Paid Well

Question: As a board member who has perhaps been involved in setting pay levels for executives, what is your view of executive compensation? (Mark Thoma, Economist’s View)

John Allison: I think executive compensation ought to be set by the marketplace. Boards do make mistakes sometimes in the executive compensation process. I think there have been some obvious abuses of executive compensation in a few cases, but I think the more generic problem is not that people could be paid well, but the measurement of performance is not right. And I think the two errors that have been made, one, a lot of time performance is measured too linearly, it doesn’t include the comprehensive performance, and secondly, a lot of times performance is too short term. So I think that boards should be setting compensation, I think highly performing people ought to be paid very well based on market conditions, but I think boards should do a good job and I think, frankly, I think our board has done a good job being sure the compensation is not just linear and being sure it covers a long period of time, not just what happens over a short period.

Question: Is giving shareholders more control over the level of compensation that executives receive an answer to the problem?

John Allison: I think that the shareholders have to select the board members and the board members have to make those kind of operating decisions. I don’t think shareholders have enough information to make concrete operating decisions. They can put the board in the position--they simply couldn’t attract the kind of talent that they need to operate. We’re seeing that right now with some of the interference by the government in setting executive compensation. I do think shareholders should be very careful in selecting the board members. I would say this though; I don’t think shareholders have been un-guilty, particularly institutional shareholders, in what’s been going on recently, because a lot of shareholders are very short term oriented. And so they encourage short-term performance and they give executives that act in a short-term manner. So I think if shareholders want a different long-term result, then they need to invest for the longer-term perspective and that’s a really important responsibility versus micro managing the board process.

The task of setting salaries lies completely with board members and the marketplace; the only real question is how to get boards to better gauge comprehensive performance.

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