November 19, 2012

What Drives Executive Compensation?

Per ThinkProgress, nineteen executives of the Hostess company may be awarded bonuses as part of a bankruptcy agreement. The bankruptcy has come to pass because Hostess would not or could not pay its unionized bakers an acceptable wage and consequently the union advised its members to seek employment elsewhere.

Why would a company wish to reward its executives with bonuses, when they oversaw its demise? In trying to find an answer to this question, the following assumptions seem safe to make:

  • A union's demands from a company on behalf of its workers can't be a bluff if it advises those workers to find other employment rather than accept the status quo.
  • Those demands can't be frivolous if the union is willing for their workers to lose pay or even jobs fighting for them.
  • An executive's pay can't be based on the productivity or profitability of their company if they get a bonus when the company goes into bankruptcy.
  • Executive compensation is meant to reward accomplishment.
So, since the only thing that these executives do seem to have accomplished was capping workers wages, is it possible that this in and of itself is worthy of compensation? Has our free enterprise system become so twisted that managerial talent is focused: not on creating more and better products, selling more of them to more customers; but rather on reducing labor costs so as to funnel a greater share of profits from current sales to shareholders?

Free enterprise is not inherently good or bad. It can serve the greater good or the cynical desires of a crafty elite. I think the latter prevailed in this instance.