There's been a lot of heated debate over sky-high corporate compensation, but little information about how those immense salaries are agreed to.
Supporters of the current system will point out that those CEO's don't dictate their salary. It is negotiated in a free-market system.
Is that the whole story? No. In fact that is only a half-truth.
Since 1950 the ratio of CEO to employee pay has widened 1000%.
In 1950 CEO's were making 20 times the average employee's pay. Now they are making 204 times the average employee's salary. This is a purely American (and English) trend.
top executives of major companies in Europe, Japan, and South Korea earn around one-tenth as much as CEOs in the United States.CEO's, who have never been known for modesty, like to say that they are worth it. The WSJ defends the salary disparity by comparing it to major league baseball pitchers.
But is that an accurate comparison? No, it isn't.
In fact, several studies have found a negative correlation between executive pay and corporate performance. Example studies can be found here and here.
When Bob Nardelli stepped down as CEO of Home Depot, he pocketed $240 million despite his company's stock price declining 40%.
What about the "superstar CEO" that the WSJ talks about? Well, that's a myth too. One study showed that 10% of companies that paid their CEO's the most underperformed the market by an average of 8%.
In fact, there is only one correlation that can be proven concerning CEO pay: how many people they fire.
The CEOs who laid off the most employees during the recession are also the CEOs who took home the biggest pay checks, according to a study released last week. CEOs of the 50 U.S. firms that slashed the most jobs between November 2008 and April 2010 took in 42 percent more than the average CEO at an S&P firm, according to the 17th annual Executive Excess study by the Institute for Policy Studies. The study also found that 36 of the 50 layoff leaders “announced their mass layoffs at a time of positive earnings reports,” suggesting a trend of “squeezing workers to boost profits and maintain high CEO pay.”It's important to point out that while Wall Street is famous for overpaying, Silicon Valley is actually a bigger criminal in this regard.
This brings up the obvious question of: who are these people who agree to pay these CEO's such enormous salaries for failing?
That would be the corporate directors.
If anyone were putting a check on CEO pay, these sorts of practices would be standard, but they aren't for a simple reason. The corporate directors who are supposed to be holding down CEO pay for the benefit of the shareholders are generally buddies of the CEOs.It's called cronyism, and it is rampant in corporate America. Just look at who sits on who's board of directors.
A good example of this is JP Morgan Chase's CEO Jamie Dimon, who recieved a 74% raise in the same year his bank paid $20 Billion in fines for illegal activities.
Sitting at the chair of the board of directors was...Jamie Dimon. Other directors on the board were also highly paid CEO's.
So how do directors come up with numbers for these huge salaries? It's called "benchmarking". What it involves is the board hires a consultant to survey a peer group's pay range, thus using it as a benchmark.
So far, so good, right? Unfortunately, no.
Well, except just as all the children at Lake Woebegone are above average, no board likes setting a target below peer group norms. I have heard of numerous examples of targets being set somewhere in the top half (66th percentile, top quarter, top 20%), hardly any at the mean, and none I know of below average.With this built-in bias you can see how CEO pay will far outpace inflation. To make matters worse, some boards use peer group's that stretch the definition of "peers" in order to justify even higher pay.
Why would they do that?
Some boards, in the face of much evidence to the contrary, remain convinced of what Elson calls “superstar theory”: they think that C.E.O.s can work their magic anywhere, and must be overpaid to stay. In addition, Elson said, “if you pay below average, it makes it look as if you’d hired a below-average C.E.O., and what board wants that?”Of course shareholders could put a stop to this, but shareholders are disenfranchised. Passive investors in ETFs and Index Funds account for 22% of the market, and they only care about performance. They couldn't care less about who runs a company.
Every once in a while the shareholders will put up a fight, but it isn't unusual for the board to simply ignore the votes of the shareholders.
After all, board members are spending shareholder money, not their own.
All the SEC has done about these outrageous compensation packages is to insist that it be transparent. As if to embarrass the directors into being more responsive.
But it begs the question: are the people that are handing out these hundred million dollar salaries beyond shame?
Speaking of shame, we should stop here to note how right-wingers will be the first ones rushing to defend the salaries of these overpaid CEO's. They will accuse anyone who complains of jealousy, and that they deserve to be paid 204 times the salary of their average employee.
In the very same breath these same right-wingers will denounce auto factory workers for making $30 an hour. Why? Because that is too much money. The contradictions of this hypocritical illogic never seems to occur to them.
When I was growing up public school teacher salaries used to be the butt of jokes for comedians. Now right-wingers are demanding they be slashed because they are "too high".
Their logic seems to be “above average pay is bad, except for the 1%”.
11:41 AM PT: Coffeetalk asked the obvious question below: Why does CEO pay matter to me?
It's my mistake for not including the answer to this question in my diary to begin with. Here is me fixing that mistake:
For starters, studies show that sky-high CEO pay cascades down to other executives that also get overpaid. This is a key ingredient in pay inequality.
Secondly, the structure of their compensation encourages them to lay off employees, making it hard for all us workers.
Thirdly, its simply bad for business, thus making it less likely the companies will expand hiring.
There are other reasons.
Because of the yawning gap between the leaders and the led, employee morale is suffering, talented performers’ loyalty is evaporating, and strategy and execution is suffering at American companies.