Today at TILE we talked about the most recent uproar over executive compensation. How can some firms be contemplating record compensation while so many people are out of work? Is it a good thing if executives make a lot of money? A bad thing? And is it possible to have a conversation about this hot topic without yelling?

Last week, a few investment banks (well, technically they are bank holding companies, but they still act like investment banks because they don’t really lend money to businesses), announced their quarterly earnings. During these announcements, they identify how much money they’ve put aside for compensation. The bank that has been taking the most heat lately is Goldman Sachs, which has already set aside $16.7 billion in the first nine months of the year. To put that number into context, that’s approximately $700,000 per employee! In 2007, they paid out approximately $20 billion in compensation and in 2008 it was a little over $10 billion. But how can these banks be flirting with record compensation when the economy is so bad and after taking so much money from the government less than a year ago? Why doesn’t some of that cash go back to the taxpayer?

Admittedly, this is a heated conversation. Those in favor of high executive compensation point out that incentives can be a good thing. If individuals are motivated by the promise of high compensation, they will work harder to generate more revenue for their companies and that will benefit the larger economy. Goldman, for example, said they would be giving an extra $200 million to charities this year. They argue that limiting how much companies can pay their top-performing employees will hurt innovation, cause these individuals to leave, and (an extreme point) that it is against a capitalistic way of life.

Critics, on the other hand, ask, “how much is enough?” and “does it seem right that the same organizations that accepted government assistance are now paying out record bonuses?” In business, we often look at relative pay: how much an employee makes compared to peers at other companies (what can I make if I take my services elsewhere?) and how much does one job pay versus another. Our friends at GOOD magazine recently held a contest for people to visually express those comparisons for CEO pay. You can take a look here. These graphics bring up some interesting questions. Some contestants included the comparison, “what else could that money buy?” Try to understand both sides of the argument and then form your own opinions.

Personally, I am all in favor of incentive systems that encourage innovation, differentiate those who produce, and support a growing economy. That being said, it feels different this time. Although many of the banks have paid back the direct “loans” from the government, there are still indirect ways the government helped these firms weather the storm that it hasn’t been paid back for. Financial institutions like Goldman Sachs and JP Morgan were able to reduce the cost of borrowing debt because the government pledged collateral for them. It’s kind of like if you wanted to borrow your friend’s car and they only lent it to you because your parents said they would buy them a new car if you smashed his or hers up. That benefit, which saved banks hundreds of millions of dollars, fell to the bottom line (and to bonus numbers) instead of going back to the taxpayer. Most businesses expect a return when they help someone – why shouldn’t the government do the same?

What does this mean for the TILE Community? Well, as you get closer to that time when you pay your own taxes, everything the government does with its budget (taxpayer money) impacts how much you will pay (or not pay). If you feel strongly about more or less regulation, let your Senator, Congressman, and friends know about it. The topic is especially hot right now, as Obama is about to go out and rally support for increased government oversight in this and other areas. Now is a really important time to say what you think because the regulations and laws being set today will make a big difference in your future.

- Amy