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Top-Level Greed

Written by Alexandra Lucas
Edited bySarah MejiaGreed has been a driving incentive for success in the business world since the creation of the joint stalk trading company hundreds of years ago, but greed is not necessarily bad. Greediness can be used for motivation, and can therefore contribute to a firm’s success. However, regulating greed is one of the most daunting challenges within the executive world, and the line between positive and negative greed is hazy at best. The Wall Street Journal consistently reports stories on the outrageously large salaries and bonuses of top executives, particularly as they often do not correlate with the success of their respective companies.Dating back to Adam Smith’s critique of the joint stock trading company, there have been countless instances of top management caring more about their own personal gain and less about others’ money, letting greed drive them to take money from lower level employees. Scandals such as the Enron financial scandal in 2001 left Wall Street and government regulators with disasters to clean up and cooperate governance to be emplaced. The chart below, from Forbes magazine, is an interesting visual on how the initial impact of new government regulations in business created a significant drop in overall executive pays in 2002 and 2003.

Screen Shot 2014-02-12 at 3.48.19 PM
The WSJ article titled “Rethink Executive Pay” assesses chief executive James Dimon and other top management of J.P Morgan by asset value and bonuses/compensation packages. This past year Dimon’s 23 million dollar compensation consisted of 93% stock-or-cash based bonuses. Citigroup, another leading U.S banking company, ranked third based on assets and was to decide a new structure for their compensation plan after a rare rebuke of management pay structure this past April. The problem that forms when executives such as Dimon are paid in such a manner is that it creates a financial stress on companies, which can contribute to layoffs or other negative consequences for lower level employees. The difficulty that bank regulators are facing now is deciphering by how much take-home pay can be reduced before the banks suffer in turn.Many executives argue that the stress of their jobs and making big corporate decisions validates the level of pay compensation. The WSJ published an article “Strategy and Growth Decisions” that talks about the top four most difficult decision strategies that Deloitte employees/executives are dealing with.“With volatile economic conditions complicating expansionary decisions, many companies have turned their focus toward growth and margins in their current markets,” says Greg Dickinson, a director with Deloitte LLP, who leads the CFO Signals survey. “And even though cost-reduction efforts typically involve less uncertainty and are often easier to manage, CFOs say they still struggle with them. It seems that many companies have already completed the easiest of these efforts and that the remaining ones are tougher to define and execute.”So where can the line separating fair compensation and unnecessary greed be drawn? This chart below from the WSJ shows survey results of what executives have voted on for the most difficult decisions they’re responsible for making, which they argue adds to their stress and is one of the reasons they deserve their large salaries.

An ethical person could argue that regulating banks is a deontological approach, wherein executives would get paid less strictly because they are following rules. A utilitarian CEO, however, would act similarly to how Howard Lutnick acted after the 9/11 attacks. His company and employees severely suffered from the terrorist attacks, but Lutnick promised his employees’ families benefits and 25% of the pay they would have received in order to help support his fellow workers. The struggle in the short term did not outweigh the overall benefits in the long run. Lutnick acted for the prosperity of his company and not just his own paycheck.

In a perfect world, all CEOs and members of executive boards would act ethically. Greed would be only a positive motivational force, and hard work would always result in a fair compensation. Unfortunately, it is inevitable that there will be problems trying to regulate such a complex system, especially when the line between right and wrong is so blurred. All that one can hope for is that future firms can be regulated in ways that motivate management to work towards more ethical goals.
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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.
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Deloitte, Strategy and growth decisions and major change initiatives Add to CFO’s Career Stress. Money and investing Wall Street Journal. October 28, 2012
Fitzpatrick, Dan. Kapner Suzanne. Lublin S. Joann.. Banks Rethink Executive Pay, “Money and investing” Wall Street Journal. October 28, 2012

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