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Pay for Performance: Are CEOs Underpaid?

 We were struck by the news that hedge fund chief executive Edward Lampert personally earned $1 billion in 2004 and …

 We were struck by the news that hedge fund chief executive Edward Lampert personally earned $1 billion in 2004 and that the top 25 hedge fund managers averaged $251 million. A hedge fund manager typically gets a 20 percent cut of the increase in the market cap of the fund’s holdings. The hedge fund camp says this is pay for performance. The mantra is, “We only get paid if we make money for our clients.”

But let’s do the math. What would happen if Jeff Immelt got the same 20 percent? General Electric has a market capitalization of roughly $390 billion and in many ways is a portfolio of different operating units, much as a hedge fund is. If Immelt had a good year and increased GE’s market cap by 20 percent, or roughly $80 billion, he’d be entitled to take home $16 billion. Think of the outrage that would provoke.

What makes the hedge fund pay packages all the more shocking is that hedge funds are a source of the grumbling about CEO compensation. Yet the shares that CEOs may receive only increase in value if all shareholders benefit. Why is that so different from what happens at a hedge fund?

Plus, hedge fund managers run organizations that are much smaller than major companies, which implies they are less complex and less difficult to manage.

Further, they don’t run nearly the same personal risks€¦quot;CEOs now are criminally liable for bad accounting.

Perhaps the moral of the story is that people who live in glass houses should not throw stones. Taking huge compensation packages while criticizing real CEOs is just plain hypocrisy.

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