Last week I wrote a piece on an executive compensation model; this week another post. This topic needs to stay in our collective consciousnesses.

I did some work for Mike Critelli about 20 years ago when I was still at Pitney Bowes. He was then and still is a straight shooter and when I stumbled upon his blog, it became a fav read.

His most recent post is his view of executive compensation. Mike asks "The obvious question is: why would boards of directors have approved these packages in the first place?" to which he wrote,

"There is a market for CEOs, just like there is a market for houses, internet stocks, or baseball players. Just as these other markets fail from time to time, with housing bubbles, stock bubbles, or overpaid baseball players, sometimes we see market failures for executive compensation, too."

As much as we rant an rave about CEO salaries, Mike describes the dynamics of a free market system; eventually salaries will hit a rationalization point and other factors will be considered when constructing offers. As he notes, the high salaries paid to executives who "trained" under Jack Welch did not guarantee the performances of the companies who put their stock in these super-executives (in fact 3M and Home Depot didn't perform well at all). The rationalization point was reached and subsequent packages were not as rich.

Mike goes on to identify one reason for the escalated salaries:

Beyond the flawed belief in the “corporate savior,” the pressure on a board to recruit the best and the brightest, and the time pressure under which many boards operate when they are recruiting an external CEO, there are other subtle factors that drive up compensation in these negotiated contract arrangements.

While the executive search firms are retained by the company and are accountable to the board, they also succumb to the subtle pressure to justify their very lucrative fee by securing the “corporate savior.” They put additional pressure on the board by pointing out that the “corporate savior” is being hotly recruited by other companies and boards, and that the board needs to accommodate his or her compensation demands.

With the eye-popping TARP bailout, executive compensation had to percolate to the top as one area of interest and investigation. Mike writes, "Right now, we are in an exceptionally populist environment, so we may see excessive controls put on executive pay that will be determined through emotions and political calculations. We must acknowledge that neither the free market nor government regulation offer a perfect solution to the perception or reality of excessive pay."

I'm more inclined to take the onus away from government on this one and place it in the hands of a non-political free-market think tank; governments have proven that not only can they do little more than conjure up polarized regulatory and deregulatory acts where the fine print taketh what the large print giveth but they can't untangle all prior acts that end up muddling things up further.

There are years of business performance data and there has to be an analytical component - as well as statutory and free-market ones - to the solution. Call it Human Resources Engineering if you want but for once I'd like to see money spent on this area the same way money is lauded upon Financial Engineering. There are many excellent multivariate statistical techniques that can be used on large datasets to distill data into information. This is where the government can help by providing research funds and computing power to conduct these analyses.

If businesses pushed this analysis project as part of TARP I'm sure they'd get the buy-in and the funds.