Fortunately, some financial commentators would concede my points above. What these people object to, however, is CEOs making a bundle even when they fail. This viewpoint is expressed in a recent BusinessWeek piece by Bill George:
The public is outraged these days over CEO compensation, with good reason. Far too many chief executive officers get paid large sums even when they don't perform. I believe that CEOs should be well-paid when they do perform, but there is no justification for paying for nonperformance.
Now this raises an interesting question: Why in the world would shareholders agree to compensation schemes that are so "obviously" ridiculous? It offends the public (and Bill George) when Home Depot's "former CEO Bob Nardelli [received] a $200 million termination settlement after declines in market share and shareholder value." Yet the people who should really be upset are Home Depot shareholders. Are we to conclude that shareholders care less about their money than outside observers?
Let's not rush to judgment. It's risky to take a job as CEO. Highly talented individuals know that, despite their best efforts, they might perform poorly. Indeed, maybe a company has dug itself into such a hole that nobody could prevent the stock from falling. Now imagine that you are such a person, and you could (say) get a sure $10 million working in some other capacity with much less stress. Your other option is to take the job as Home Depot's CEO, where you will earn $250 million if the stock price goes up, but $100,000 if the stock price tanks. Does that sound like a good deal? Would Home Depot attract many qualified candidates with such a proposal?
Obviously I am simplifying matters, and in the real world companies have all sorts of mechanisms to align the long-run incentives of management with the shareholders. My point, however, is that the typical critic who spends five minutes thinking about the issue often overlooks the large element of risk. If corporations don't want to simply hire daredevils, they will need to have lucrative contingencies in place in case things turn sour. No one objects to this at the lower levels, either: If the stock price tanks, nobody expects the janitor to give back half his salary.
Finally, I should deal with the objection that in the real world, shareholders can't exercise control over management. This is true to varying degrees. But the market has an elegant solution to bloated management who fritters away shareholder value: the corporate raider. Ironically, the government's restrictions on so-called hostile takeovers make it harder for shareholders in large corporations to clean house and install managers who will look out for their interests. As usual, the imperfections of the marketplace can be traced to the unintended consequences of earlier government interference.