Executive Compensation

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Wall Street has been under particular heat over the past ten years with the discovery of corporate fraud in companies like Enron and Tyco and more recently in bailout of 2008 in which large banks and mortgage insurance companies received billions of dollars from the federal government. Americans have become increasingly critical of the heads of these large corporations as they see their own supply of available money dwindling in the recession. The problem of executive pay and corporate greed in particular have plagued the United States since the early 20th century and has grown over the past thirty-five years despite the government and shareholders’ attempts at regulation. In our collective paper and presentation we will describe a brief history of executive compensation and how it has changed in scope and composition since the early 20th century. We will then discuss three main reasons why the level of compensation has grown exponentially within the past decade and recent solutions that have been proposed within companies themselves and by the federal government to address these problems. We will finish by discussing additional addendums that need to be made in the future to limit these issues in the future. Although executive compensation has been a hot topic for the last decade, it has not always been that way. At least it hasn’t been dubbed an “executive compensation” problem. There has always been socioeconomic inequality and manipulation of the economic system, however; it has always seemed that the noble class has been uncomfortably incestuous and suspiciously exclusive. There seems to be a pattern in this topic’s popularity that we hope to highlight for you now. Since the panic of 1893 (probably earlier, but for focus sake we’ll keep it to the last 150 years), inspection of the economic powerhouses always follows a near meltdown of the system. Then, following the crisis, attention is at its peak and regulations and acts are passed and politicians put on a great horse and pony act and the clamor subsides. The regulations and acts quiet the uproar and throw the powerhouses off their game and all is well...temporarily. It’s like the executives and high rollers are viruses and every time the immune system of our society gets them under control, the viruses mutate and infiltrate our defenses and we are back to square one. I’m going to name the main virus: greed (Stevens; Quarterly Journal of Economics, January 1894). In 1893, the Philadelphia and Reading Railroad companies were at the head of the game and banks were handing out shaky loans left and right because the railroads were a “sure shot” and the bank would collect “guaranteed” interest. These companies and many like them overextended themselves as a result of their insatiable thirst for profit and consequently went bankrupt. The banks that lent to them suffered tremendously. Then, public confidence plummeted resulting in bank runs and the failure of one bank after another. Please note that this domino effect was caused by the greed virus making the banks and railroad companies defenseless against the temptation to capitalize off the interest on the loans and the profits from the rail industry. Shortly thereafter, the Klondike Gold Rush restored confidence and helped to not only reduce attention to greed, but to strengthen its hold on the country. 1907 brought on another economic panic. While there were multiple factors that contributed to the crisis, we’d like to focus on the most infected variable: cornering copper. Back in the early 1900s, August Heinze Charles Morse owned at least six national banks, ten state banks, five trust companies and four insurance firms. Simultaneously, his family bought up a majority of Untied Copper Company stock. His brother Otis wanted to “corner” the United Copper Market. By buying a vast majority of the stock, which would cause the price to increase. This would also force the short sellers to purchase...
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