Should we care about executive compensation or how much hedge fund managers earn
ID: 2613191 • Letter: S
Question
Should we care about executive compensation or how much hedge fund managers earn? How should incentive compensation be changed? Should it be changed? Who can change it? Southwest Airline's CFO hedged fuel prices and saved the company hundreds of millions of dollars. Why was he alone in the industry in doing so? John Paulsen (admittedly controversial) made his partners $20 billion over the past two years mostly by correctly forecasting the housing market and the problems in the banking industry. They paid him over $4 billion for his work.
Explanation / Answer
Managing hedge funds is quite a challenging job as it requires one to be extremely quick and aggressive. Hence, the compensation being paid should be in sync with the efforts being put in by the manager. If at all there is a proposition for a change in compensation, it should be revised in accordance with his fund managing skills. Usually the rights of change is reserved with the upper management.Southwest Airline CFO’s anticipation of future seems to be quite excellent. That’s why he foresaw increase in fuel prices and hence, went for a hedge option to offset its impact operationally. Even in John Paulsen’s case, it is quite visible that he developed an astute thinking as to what would transpire in the near future, based on his calculation. Finally, he made $ 20 Billion and ended up getting $ 4 Billion dollar as well. Hence, for hedging, a fund manager needs to an astute sense of prediction and imagination.