What value does an executive bring to a firm?

Recently, Warner Music Group reported its executive salaries for 2012 to the Security Exchange Commission (SEC).  According to Digital Music News’ Stephen Cooper, the CEO’s salary, including bonus, was a whopping $4.3 million.  Additionally, Mr. Cooper’s expense account was $1.8 million.  The assumption might be that things are going pretty well over at Warner Music.  Not according to another filing made by Warner to the SEC, showing a loss of  $190 million in 2012.

In fact, Digital Music News reports that over the past decade Mr. Cooper and other executives at Warner have lost more than $9.6 billion.  Executive compensation has become a topic of concern over the years, and rightfully so.  High dollar salaries are intended to attract the best management and to ensure that the interests of the shareholders are properly looked after.

The key role of corporate management is to maximize shareholders’ wealth. That is how corporate boards justify high salaries. The question might be: if Cooper had not been at the helm, would the loss have been greater?  The past decade has been difficult times for the music industry, and according to Cary Sherman, Chairman & CEO of the Recording Industry Association of America, the industry has changed its business model to accommodate digital technology.

If the board of directors of Warner Music had placed certain performance requirements on executive compensation, maybe Warner Music would be paying Mr. Cooper and his executives considerably less money over the past decade.  Or perhaps Warner’s management would have more quickly adjusted its business model to better work with the changing market dynamics.  It is difficult to believe that Warner Music will continue to be a going concern at its current pace of losses.  To have lost $9.6 billion over the past 10-year period and continue paying its executives such high salaries inspire the question of who exactly Warner’s board is looking after: the shareholders, or its executives.

In the board’s defense, according to a report on the MSNBC website, the research firm Equilar has found that the average CEO pay for a publicly traded company was $9.6 million in 2011.  Warner Music is a publicly traded company, and its CEO’s compensation is well below the average executive salary being reported by Equilar.