CEO Pay

April 1, 2014

In the New York Times on March 29, 2014, Deborah Hargreaves comments on the growing pay gap between CEOs and the median compensation of their employees (http://opinionator.blogs.nytimes.com/2014/03/29/can-we-close-the-pay-gap/?smid=fb-share).

She reports that in 2012, the pay of S&P 500 CEO’s was 354 times that of their rank and file! Last year, the 10 highest paid CEOs took home more than $100 million each. In the early days of the 20th century, JP Morgan thought the ratio of CEO pay to median worker pay should be no more than 20:1. In the 1970s, Peter Drucker thought that was still a good limit. Yet, since the 70s, we have only sharply advanced that ratio.

Arguments from the right are that we should not tinker with the market. Let the invisible hand do its work. Limiting CEO pay, they argue, will only drive the best CEOs out of the US to other jurisdictions.

Hargreaves reports that a survey of actual practices finds little support for that notion. There is just not that much international movement of CEO’s.

Hargreaves finishes without a strong policy recommendation. I do the same. It is not yet clear to me that a regulatory limit is the right solution to this clear inequity.

However, it is a valuable step for us to all recognize the magnitude of the problem. Wealth and income gains for the top 10 percent have grown significantly, while the real wages of middle class and poor have advanced very little across the last thirty years.

Two suggestions Hargreaves reports deserve consideration: Full disclosure of CEO/median pay by all public companies; and, a German practice of installing a company board made up 50 percent of workers, with the authority to establish CEO compensation.

Anyone who has worked in the business sector and has had access to the variety of major elements of compensation (salary, bonus, and stock options) certainly knows that attempts to structure compensation to clearly and directly reward or punish success and failure, is fraught with assumptions and guesses, and often fails to achieve the objective, as the real world twists and turns after such commitments are made. Often, it turns out that the chosen measures of success yield more to the economic and competitive environment than to the talent of the CEO. Likewise, it is also true that CEOs do sometimes lose their jobs when such uncontrollable factors are the cause of failure–i.e., no one could have done much better.

Often rewards are tied to short term performance, and/or to stock price performance. No one could have won on stock price in 2008, and no one could have failed in 2013. It’s not quite that simple, but almost.

Why would it be problematic to report in great detail to shareholders, just how CEO and other top officer pay compares to the median wage of the company? What could be wrong with including all forms of compensation, including bonus, stock options, use of the corporate jet, and any other forms of compensation (executive pensions, golden handcuffs, etc.)? What could be wrong with that?

I’m sure some on the Right will argue that shareholders simply won’t understand it, and it will only incite concern, rancorous shareholder meetings, and controls that do not reflect market condition in an increasingly globalized world.

In my opinion, we need some rancorous shareholder meetings, and it’s not in the spirit of competitive markets to deny the owners of the business (shareholders) all the information they need and the opportunity to decide the corporate pay at the top levels.

On my way around town this morning, thinking on this and related issues addressed in this blog, I was motivated to leave larger tips for the baristas and others who serve me–considering how poorly we have protected the opportunity of our citizens at those pay levels.

Regrettably, individual tipping and philanthropy will not be sufficient to enable the rebalancing we need to secure the sustainable future of our nation.

I welcome your comments

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