With robust economies in
America boosting companies’ sales, corporate tax cuts, and an increase in stock
buybacks lifting stock prices in 2018, the default mantra in executive
compensation circles that high CEO pay is justified if it is tied to firm
performance could be questioned. Similarly, the typical assumption that high
pay would have to get higher for a CEO to be motivated to do the basics of the
job, including overseeing mergers and acquisitions, (or that doing the basics
warrants a raise) could be questioned. Particularly in 2018, the comfortable,
self-serving ways of the business elite in the U.S. were ripe for critique.
An analysis by The New York
Times shows that the medium compensation for CEOs in 2018 was $18.6 million,
which represents a raise of $1.1 million, or 6.3%, from 2017.[1]
Meanwhile, the average private-sector worker got a 3.2% raise, which translates
into 84 cents per hour. In short, the CEO compensation increased at almost
twice the rate of ordinary wages. The question is whether the increase was
justified or a matter of the American business elite taking care of their own.
Years earlier, Congress had
given shareholders of American companies a “special but nonbinding vote” on the
ratio of a CEO’s pay to that of the medium employee.[2]
The nonbinding feature meant, however, that populism would have no weight in
corporate boardrooms. If lawmakers had been motivated by corporate campaign
contributions, the nonbinding nature of the vote suffered from the start from a
conflict of interest exploited by the political and business elites.
Even the (pro-active?)
response of corporate boards to pressure from some shareholders and advisory
firms is problematic even though it seems to make sense from business
perspective. Boards have been tying more of a CEO’s pay to the company’s
financial performance as if the CEO has a big impact as distinct from
structural forces such as a good economy or a tax cut that help companies’
bottom lines and stock prices. Boards “continue to act as if C.E.O.s have
unique powers to deliver better returns.”[3]
For example, Testla’s board
approved compensation as much as $2.3 billion for Elon Musk, the CEO. To be
sure, the company’s market value would have to increase 18 times to $650
billion for Musk to see get all “the options in the award.”[4]
The board members tied the high compensation to company performance so he would
“devote his time and energy” in Tesla rather than “wander to his other
ventures, like SpaceX, or that he could leave Tesla altogether.”[5]
As pointed out by the Times, this logic is flawed, for he already “owned
roughly a fifth of Tesla, [so] his financial interests were already strongly
aligned with the company,” according to Analysts for Institutional Shareholder
Services.[6]
Additionally, a highly paid CEO (without counting the 2018 award, had it been
awarded) should be expected to be motivated by the high pay alone (without a 6%
raise) to devote a lot of time and energy to the job. To be sure, Musk was at the
time considered a visionary at the company. However, using
tied-to-firm-performance to motivate him to show up each workday suggests that
the criterion or basis undergirding executive compensation is problematic—and this
doesn’t even take into account the matter of getting compensated more because
of a tax cut or a strong economy, neither of which a CEO should get credit
unless he or she had made the political contribution that got the corporate tax
cut passed.
[1]
Peter Eavis, “It’s
Never Been Easier to Be a C.E.O., and the Pay Keeps Rising,” The New York Times, May 24, 2019.
[2]
Ibid.
[3]
Ibid.
[4]
Ibid.
[5] Ibid.
[6]
Ibid.
