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Executive Compensation: Performance Matters

High, even exorbitantly high executive compensation is okay, that's right, I said it -- it's ok. But it is only okay if the compensation is directly linked to performance. The ultimate goal of any corporation that is publicly traded in the U.S. is to maximize shareholder value. No one seems to complain when a CEO is paid millions of dollars in annual salary and stock options, as long as they are bringing in large sums of money, increasing revenues, and growing their companies and share prices. But when CEOS, CFOS, and other c-suite level executives are still making multi-million dollar bonuses as their companies are crumbling around them, sending stock prices plummeting, taking people's entire nest eggs and retirement savings down with them, then there is a problem.

One important distinguishing factor, though often difficult to pin-point, is the extent to which a company's performance is actually reliant upon the strategic decisions of the CEO, and other upper-level managers. A CEO could have the best intentions, and make the best possible decisions for his or her company and its shareholders, yet their company could still be struggling, especially in this economy. It is important to distinguish between uncontrollable environmental factors, and internally manageable decision making. Take a small manufacturer of some sort of widget say, ball bearings designed solely for General Motors vehicles, for instance.

If this company is dependent on GM's sales forecasts for its own sales, then it may be finding itself in a bit of trouble right now. No matter how well this company's executives manage their employees, strategic decisions, plant, and overall manufacturing capabilities, if they are entirely dependent on a company external to them, then their sales and overall financial performance will fluctuate with demand. It may not be right to punish the executives by significantly reducing their compensation, if the problem is truly out of their hands.

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