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Excess Compensation

November 22, 2009

How much is too much? How much is enough? What’s fair and who decides? Only the marketplace knows.

Compensation decisions are some of the most important and difficult decisions that business owners have to make. Ultimately, the amount of money available for compensation is determined by the value the market place is prepared to pay for a company’s products and services.

A private business has finite resources which must be carefully allocated to a number of activities. You can’t pay what you don’t have. If you do, you won’t stay in business too long.

The marketplace is the mechanism that provides efficient answers to most compensation questions. Not always the answers we’d like to hear, but answers nonetheless. When the market’s guidance is not followed in the short run, it will certainly impose harsher solutions in the long run.

Even in the best of companies, there are inequities in compensation programs. To remedy all of the inequities at once would prove too costly. Management must make the best of a rapidly changing, imperfect world in order to stay competitive and solvent.

In our economy, employment can be found in either the public sector or the private sector. Within the private sector, employment opportunities can be further divided into two groups, large public corporations and smaller private businesses. While the small privately owned business must adhere to the dictates of the market place, that’s not always the case in other areas.

The laws of supply and demand are the principle forces for maintaining a balanced wage structure in the economy. If the supply exceeds the demand, prices don’t go up.

Could you imagine a business, deeply in debt, with ten applicants for every position available, proposing to increase compensation by 50%? That’s what the recently defeated Congressional pay raise proposal would have accomplished.

Although the issue of a Congressional pay raise was defeated, you can be certain it will raise its ugly head again in the not too distant future. There are a number of persuasive arguments that can be put forth to support higher governmental salaries, but, the fact remains that the jobs are in high demand at the current pay rates.

How many businesses are going to be able to provide a 3.6% cost of living raise to its employees plus a minimum 8% raise in the coming year? That’s what is being proposed for top federal officials.

Contrary to many published reports, top public sector compensation is comparable to compensation in smaller private businesses. And while the pay is at least comparable, the fringe benefits and job security are superior.

It is the smaller private businesses that have proved to be the most competitive sector of our economy. I know a number of privately owned businesses that would like to do more for their employees, but their financial structures just couldn’t absorb the costs.

It’s quite probable that many of the better public sector employees are underpaid. But that’s also true in many businesses. It’s particularly true in organizations, public or private, where job security is high.

But why should a debt ridden bureaucracy increase wages with an abundant supply of qualified applicants available? It’s interesting to note that more and more socialist economies around the world are looking to free market solutions to alleviate their economic woes while certain segments of our economy ignore market logic in favor of the special interests of entrenched minorities.

The multimillion dollar executive salaries for the top officers of large publicly owned corporations are equally disturbing. Those salaries are set by Boards of Directors that are supposed to represent shareholder interests but, in actuality, are more beholding to the managers they are supposed to be supervising.

If there is an abundant supply of qualified Congressional candidates at $80,000 and federal administrators at $45,000, there is a tremendous supply of business executives available well below the one million dollar level.

What’s the damage? It distorts the system. The eventual result will be economic inefficiencies, higher inflation, increased taxes, or a combination of the three. All burdens that the efficient small privately owned business will eventually be called upon to bear.

It’s ironic that the only I.R.S. regulations that deal with excess compensation pertain to the owner/managers of privately owned businesses. If any business organization should be allowed to pay its executives what they want, it should be private corporations.

Because the market’s remedy for these excesses will be inflicted upon us all, it’s your business to know what’s going on.

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