Is the American approach to executive compensation badly broken? Mark Cuban, the celebrated entrepreneur, believes that the answer is yes, and his solution is to shift executives from what he calls “the equity/lottery ticket zone” to the “cash zone.”

Steven Kaplan, a professor at the Booth School of Business at the University of Chicago and a leading expert on the subject of executive compensation and corporate governance more broadly, maintains that keeping executives in the equity zone motivates them to manage for the long-term.

Average CEO pay in 2009 at S&P 500 companies (inflation-adjusted) was 50% of its peak in 2000. Median pay was down over 20% from its peak in 2001. Pay moved up in 2010 because performance was good in 2010, but still remains well below peak levels. Hardly the case that their pay keeps going up.
Stock ownership motivates CEOs to do the right thing for the long run. Because they were so quick to cut in 2008-2009, U.S. companies have record amounts of cash on their balance sheets and are probably the healthiest part of the U.S. economy. This occurred after the one of the worst economic environments since the Great Depression. Nobody is saying the companies are not healthy and in good shape. In a real sense, non-financial company CEOs have been heroes through the crisis.

Suffice it to say, Professor Kaplan’s view that non-financial company CEOs have done the American economy a great service is not widely embraced, but the health of the relative corporate sector suggests that there is something to this line of thinking.

The conundrum is why companies are not investing and hiring. The answer, I fear, lies with macro uncertainty, regulatory driven uncertainty, and regulatory overkill.

Observers often lament the fact that corporations have record amounts of cash on hand yet choose not to spend it on hiring. One wonders if we’d somehow be better off if corporations were in terrible shape and that was the reason they weren’t hiring. I’d suggest that if most large American corporations were badly governed and broke, the U.S. economy would be in far worse shape and that the remaining bright spots, ranging from high-end consumption to innovation in consumer internet technologies, would dim.

Rather than see the fact that the corporate sector is doing reasonably well even while the rest ofthe economy is not as a reason to be suspicious of corporate executives, perhaps we should point the finger elsewhere. It is at least possible that other sectors of our economy, including the public sector and the nontradable sectors most heavily shaped by public subsidies and regulations, are the more serious barrier to renewed hiring and growth.

This conversation reminds me of the recent BCG book Accelerating Out of the Great Recession: How to Win in a Slow-Growth Economy. It offers a number of case studies on how a number of innovative firms flourished during the Great Depression and in doing so built the foundation for future growth. This process often involved aggressive fiscal consolidation, including at companies that weren’t in the red and on the edge of death. Politicizing this process by characterizing layoffs as unpatriotic, as Mark Cuban does, might make matters worse in the long run.