A Financial Meltdown
Pay incentives are only one of the things that led to the financial crisis. I don’t think you can blame the crisis solely on them; it was a combination of many different factors. At the time before the crisis, companies were experiencing a great deal of growth and financial success. This led to CEOs and other positions receiving benefits from this success. When things began to downturn, these individuals kept receiving these large bonuses even though they didn’t deserve them. In many cases, businesses were on the edge of bankruptcy and CEOs were still receiving huge bonus checks.
Let’s look at Goldman Sachs CEO Lloyd Blankfein. According to Bloomberg business, he earned a whopping $26 million in 2012. This was at a time when Goldman Sachs cut over 900 jobs and had an absolutely terrible year in terms of profitability. This also put him in the top 20 of highest paid CEOs in America.
The public was outraged by the bonuses being handed out, which led to a huge number of CEOs and managers changing their wages. Many even decided to work for $1 or for free. They also stopped receiving the bonuses to help improve their reputation with the public. Many were forced to do this to save the reputation of their business.
CEOs should not receive any bonuses unless their company performs well. They should still receive a base salary, regardless of performance; however, if they don’t perform well, they won’t keep their job anyway. Bonuses should only be handed out if the company is succeeding. The “bonus bank” plan might work, but I don’t really see a need for it. You just need to evaluate the company’s performance and then hand out the bonuses. No money should be handed out until the performance is evaluated.
A Shrinking Salary
Total salaries of CEO’s should probably be reduced as well. Many are making several million dollars when the companies they work for are struggling to survive. A base pay of $500,000 would probably work well in most situations, with the chance of moving up if the company performs well. If their pay becomes directly related to performance, they will probably take their job more seriously.
Those tough decisions will become even tougher and they will probably take fewer risks. The government shouldn’t regulate this though. I think it individual businesses need to decide for themselves. If they want to waste money paying their CEO, they can go right ahead; it’s only going to hurt their company in the future.
Not every business has decided to overpay their CEO, however. A recent discovery by Forbes shows that J.C. Penney CEO Ron Johnson took at 96 percent pay cut in 2012, going from $53.3 million to $1.89 million. While his exact income is unknown, Johnson also received bonuses and incentives based on performance. This follows the traditional idea that pay should be based on performance. The $1.1 billion in operating income at J.C. Penney allowed Johnson to receive a hefty bonus.