Conversations with Kellogg February 26, 2010, 1:04PM EST

Executive Compensation and Public Outrage

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Camelia Kuhnen

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I see no reason why if they care about their money they wouldn't pay very good attention to what the board and the management are doing.

The public outrage about pay is a wake-up call for shareholders themselves to pay attention [and make sure] that they have the right people sitting on the board, that the CEO is being monitored very well.

It's good to have the public outrage. It makes shareholders ask, "Do we have the right strategy?" "Do we have the right leader and is he or she being paid the right amount?"

Should the government be involved in regulating pay?
You want to have public outrage because this makes shareholders pay more attention, but you don't want outrage to lead to government intervention just to please the public. I don't think regulation is the answer.

Shareholders can get more involved and they can keep a better eye on management. But they really need to understand who is on the board of directors and the relationships between the board and the management of the firm. Research has shown that these relationships are quite important. You want to have independent watchdogs on the board.

So the solution is better governance, not government?
We don't want government intervention. We like shareholders to be given the opportunity to monitor management.

What do you think we will see from now on?
I think salary and restricted stock will be the preferred way to incentivize executives.

Do you think when the economy hopefully rights itself and we're clearly in recovery and everyone is feeling good again that this issue will die down?
I think so, because this public outrage is fueled not by the fact that the CEOs got so much money but that the rest of us got so little. When the economy is doing well and everybody is making money, Americans are very comfortable with having their CEOs paid a lot.

But when we hit a rough patch and the economy tanks and people start losing their jobs and they start having their salaries cut, but they see that their CEOs are still making millions of dollars, you are going to get outrage. And that outrage leads to these shifts in CEO pay.

Camelia Kuhnen is an assistant professor of finance at the Kellogg School of Management at Northwestern University. Professor Kuhnen studies incentives in the workplace and she also studies the micro-foundations of financial decision-making by investigating the brain mechanisms responsible for learning and risk-taking in financial markets. For more information about the Kellogg School of Management, including its MBA and its executive education programs, visit www.kellogg.northwestern.edu.

The Kellogg School of Management at Northwestern University is widely recognized as a global leader in management education. A regular feature of the BusinessWeek Online Management Channel is Conversations with Kellogg in which Management Channel Editor Patricia O'Connell talks with a Kellogg School faculty member about the management challenges that lie behind the breaking business news stories of the day. Kellogg's faculty members are known for their research, teaching, and practical connections to the world of business and management through the school's MBA and executive education programs.