The issue with executive compensation

What kind of world do we live in where we value the contribution of a man who risks his life to save the lives of others at a fraction of what we value the man whose life he saves? A battalion chief in NYC makes a total compensation of about 148K per annum. It takes well over 15 years of service to become a battalion chief. A firefighter risks his own life in the course of his duty.

Now compare that to the life of an an investment banker - he starts with a salary higher than that of a battalion chief. He risks nothing but other people's money. And in the process our society is willing to reward this species really handsomely. Is this the meaning of risk reward relationship?

Compensation programs world over have tended to go in the wrong direction - overcompensate some and undercompensate others. Executive compensation has tended to reward folks handsomely more for taking outsized risks with capital and less for showing consistent good judgement and for being an effective leader. Nowhere has this behaviour been exemplified in the worst way possible than in the financial services sector.

Here are the issues with the world of executive compensation

a) Excessive focus on individual performance
b) Excessive focus on short term value creation
c) Poor board oversight on performance and compensation
d) Establishing risk reward relationships that drive poor decision making
e) Inadequate transparency of performance measurement and compensation
f) Very little focus on taking punitive action for poor decision making
g) Increasing complexity of bonus pool calculations and payouts particularly for frontline roles
h) Irresponsible compensation consultants who instead of providing sound advice that can challenge status quo, only pander to the needs of senior executives

One bank that has managed to avoid a large portion of the subprime crisis and resuling mess has been HSBC - why? Among many reasons that include their strategy, geographic presence and good risk management, their rewards structure supposedly does not reward frontline staff so differently from the support staff that frontline staff start behaving irresponsibly. The differential is kept to a manageable minimum and individual stars, while celebrated are quickly cut to size if they become too big.

I must clarify - I am not against paying senior executives well. They should get paid well - but for what ? In my opinion for making tough decisions that have a positive impact on the company's financial and non financial performance on a multi year basis - not just one year. All of these folks make more money than what most people do in multiple live times - and I dont grudge them that - But I do get annoyed when people get compensated handsomely even when they have destroyed other people's wealth just because "the market demands it!"

I support the cap on executive compensation for banks receiving bailout money - none of the CEOs on that list need any personal assistance with mortgages - they havent foreclosed, but their customers did only because the banks sold them loans they couldnt afford! Shouldnt the CEOs and other officers be punished for this irresponsible behaviour?