CEO Compensation: How Much Is Too Much?

From the previous year, the medium value of salaries, bonuses and long-term-incentive awards for the CEOs of 350 major American companies increased by 11% in 2010 to $9.3 million, according to the Hay Group.  Corporate net income increased by a medium of 17% and shareholders medium returns, including dividends, increased by 18 percent. Share prices also increased more than the CEO compensation. However, bonuses increased 19.7%, which is just barely more than the percentage increases in corporate profit and shareholder returns.
Of course, comparing percentages can be misleading because the base amounts can differ markedly. Ten percent of 100, for example, is less than ten percent of 1000. The issue regarding CEO compensation may have less to do with comparisons to corporate net income and stockholder returns, as these are different categories, than to the absolute amount of the compensation.
One might compare, for example, the amounts earned by a typical CEO and a typical worker. In 2000, on average, CEOs at 365 of the largest publicly traded U.S. companies earned $13.1 million, or 531 times what the typical hourly employee earned. The corresponding ratio in 1990 was 85 and in 1980 it was only 42, according to Finfacts. It is unlikely that the contributions, and thus value, of CEOs to corporate bottom lines were increasing accordingly--both in absolute terms and relative to the sweat of hourly employees. In fact, Sarah Anderson points out that many of the executives responsible for the financial crisis of 2008 used it as a springboard financially. Specifically, at ten of the financial firms that received bailout money, executives were awarded stock options when the market was at bottom. After the taxpayer funds helped lift the price of the stocks, "the executives who brought the global economy to the brink of disaster" saw their portfolios increase in value by $90 million. This surely violates the maxim of justice as fairness, especially as theorized by John Rawls.
Furthermore, it is doubtful that American CEOs are more talented than those in Europe and Asia. According to Finfact, income inequality in the U.S. was, as of 2003, greater than anywhere else in the industrialized world. One could be excused for asking whether the highest CEO figures are beyond even what one person could reasonably spend (without giving tens of millions away at a time without a thought) even in a very comfortable life of luxury.
Viacom CEO Philippe Dauman, for example, topped the list at $84.3 million, more than double his 2009 pay. Even if a significant portion of this figure are stock options that cannot be sold for several years, the total amount is so far beyond what a person can use even for luxuries that one might wonder what impact it could have on the CEO. Moreover, the amount dwarfs by many times the salaries even of middle level managers, not to mention workers. The amount itself is sufficient to raise some questions.
For example, can the worth of a particular CEO to a corporation really be worth $84 million?  Is that amount necessary to motivate or sufficiently reward a manager who happens to be the CEO? Is the potential CEO labor market really so limited? Is corporate governance itself at issue? Given the influence that CEOs can have over the boards tasked with overseeing them as well as setting executive compensation, the obscene numbers may be indicative of the conflict of interest.  Where a CEO is chairman of the board too (i.e., duality), the conflict of interest is structural and bears on corporate governance itself. That American CEOs get paid more on average than European CEOs suggests that the American compensation amounts may be due to arrangements pertaining to American corporate governance rather than occurring naturally from a competitive labor market.
From a governmental standpoint in a republic, the high CEO compensation signifies concentrated private power. Such power may be an inherent threat to representative democracy wherein each citizen able to vote has one vote. In other words, the pay may incur systemic risk to the republic itself as a representative democracy. Such concerns can and should constrain even private contracts, for individual transations should not be allowed to put the whole at risk.Yet if concentrated wealth already has bought the mainstream candidates and government officials such that they are in its grip, the high compensation amounts are effectively protected and the republic can be expected to run without contradicting this particular powerful vested interest. The only way out of this negative feedback group is for the people to recognize the manipulation and corruption in the halls of their government and vote accordingly. The problem is that such action is apt to be decentralized unless candidates outside the vested interests can raise above the din of the party lines.

Sources:

Joann Slublin, “CEO Pay in 2010 Jumped 11%” The Wall Street Journal, May 9, 2011, p. B1.

Michael Hennigan, "Executive Pay and Inequality in the Winner-Take-All Society," Finfacts, August 7, 2005.

Sarah Anderson, "Can Europe Pop the U.S. CEO Pay Bubble?" CommonDreams.org, September 2, 2009.

See related essay: "Wall Street Bonuses and TARP: A Tale of Two Cities"

Slovak Resistance to Expanding the E.U. Bailout in 2011

Richard Sulik, Parliament Speaker of the Slovakian legislature, argued that the only real solution to the debt crisis in the E.U. was rigorous enforcement of the E.U. regulations on budget deficits and public debt. He had been particularly angered by his state, the second poorest in the E.U., having to bail-out a richer state that had consistently violated the E.U. regulations. Additional debt, he insisted, was not a way out for the PIGS. Slovakia, after all, had to adhere to strict limits on everything from budget deficits to inflation rates in order to be able to adopt the euro. “Now when I see what is being allowed for Greece and Italy, it really makes me angry,” Sulik admitted. “We have to pay because of this double standard. It’s a real injustice.” Indeed it was. Bailing out Greece so the state would not default effectively rewarded that state government for profligate spending and tax avoidance in violation of the E.U. regulations.  

Solely from the standpoint of debt, adding more was not a viable way out, according to Sulik. “The more we let [states] violate the rules, the worse things will get,” he said. So he opposed expanding the bailout. Undoubtedly putting a chill in the halls of banks in rich states such as France and Germany, he bluntly stated, “Greece has to go into bankruptcy.” This would demonstrate that the E.U. was not an agency of the big banks holding questionable semi-sovereign state debt.

At the very least, having a state government official resist the interests of the big banks and their politicians in the “core” states was in the interest of a fuller debate within the E.U. as a whole on how to deal with “bad” states. In fact, potentially at least, a state like Slovakia could serve as a check on plutocracy gaining a foothold in the E.U. According to Sulik, it simply was not fair to ask poor Slovaks to bailout the big banks and richer states—even apart from the latter’s violation of the E.U. regulations. In short, the E.U. should not have been run in the interest of French and German banks. At the same time, giving each state government a veto would have been a recipe for E.U. impotence at the federal level.

If the bailout had to be expanded to obviate a financial collapse of the E.U., then having one hold-out could have been a very expensive price to pay to avoid giving the E.U. additional competencies in fiscal matters. Were a qualified majority needed to augment E.U. competencies, Sulik's argument could still win the day--but his points would have to be sufficiently persuasive among the poorer states. If the banks' interest must be satisfied in order to avoid financial collapse, enough of the neutral states could turn from Sulik, who might otherwise be able to prevent the E.U. from avoiding catastrophe.

Source:

Gordon Fairclough, “Slovak Official’s Delay of Rescue Fund Vote Poses Problem for Euro Zone,” Wall Street Journal, September 6, 2011. 

CEO Pay: American and European Values

To what extent do inequalities in wealth accrue based on structural elements, such as tax deductions that only wealthy people can use, as distinct from factors pertaining to individuals, such as talent, sacrifice, and effort? The two clusters can build on each other, as people who have become rich primarily by exercising a talent and working hard use some of their accrued power to “reform” the system to their advantage at the expense of the poor and middle class. Such structural reforms in turn can make it easier for wealthy people to become even richer. In the context of a society in progress, structural and idiosyncratic factors doubtlessly interact—the trend being of an increasing chasm between the rich and poor. 

 

 

For example, as the graph above indicates, CEO compensation in the U.S. increased at a higher percentage rate than did corporate profits and factory worker pay every year from 1990 to 2005. In 2010, CEO compensation increased 27% while workers saw their compensation increase just 2.1 percent. Meanwhile, the poverty rate increased from 12% to 14%. CEOs in the E.U. were making comparably less. Foreign Policy in Focus reports that in 2006, for example, “the 20 highest-paid European managers made an average of $12.5 million, only one third as much as the 20 highest-earning U.S. executives. The Europeans earned less, despite leading larger firms.” I suspect that societal values have a lot to do with the difference, though changes in the make-up of American executive compensation should not be ignored.

Specifically, the ratio of pay between an American CEO and factory worker has been increasing in part to the growing proportion of executive compensation in the form of stock options. However, it is also true that Americans are relatively accepting of very high incomes (and inequality). A European is more likely to say, Enough is enough once a CEO has made far more than he or she could ever use. Politically, this is reflected in the fact that the Green Party and the Party of the Left are more powerful (and represented) in Europe than in America. Although the American two-party system acts to cut off the “extremes,” I suspect that the proportion of Americans who would agree with a European far-left party is less than in the E.U.

According to Foreign Policy in Focus, “In the United States, only 32 percent of the public [in 2007 supported] an outright pay cap on executive earnings. But average Americans [appeared] to be every bit as outraged over CEO pay excess as average Europeans. Indeed, 77 percent of Americans [said that] corporate executives "earn too much.” This disconnect, which I submit does not exist in Europe, reflects the American value on economic freedom and the association of freedom with putting up with someone else’s objectionable views or conduct.

In Europe, during and after the recession of 2008, “the idea of raising taxes on high-income earners” gained currency. New E.U. and state taxes were proposed, including a tax on financial transactions (E.U.) and a one-time levy on high-income individuals. In the state of Britain, the tax rate on the highest segment was increased from 40% to 50%, and in the state of Italy the government was considering in 2011 an additional 5% tax on annual incomes above 90,000 euros and a 10% on incomes over 150,000 euros. Considering the increasing fiscal demands being put on the E.U. Government and the pressing debt situations in many states, the recessionary risk of increasing tax on the rich may well be worthwhile. Indeed, Liliane Bettencourt and fifteen other billionaires made an open plea for a special tax on the European rich. Recognizing that they had benefitted financially from the European “structure,” they wanted to help preserve it.

As valuable as closing budget-gaps by revenue and spending reforms at the state and E.U. levels is, the matter of addressing a cycle of increasing economic inequality remains unanswered. If a given societal structure acts as a multiplier effect on a given inequality—exacerbating it, in effect—then something more than a new tax may be needed. In other words, any bias in the system that increases the inequality can be neutralized by the addition of a countervailing structure. For example, placing a strict limit, such as $1 million, on what an individual can inherit—with the rest going back to society via the state—would act to counter the “snowball effect” of “old wealth.” At least as of 2011, a person can live comfortably on $1 million; the surplus, being essentially surfeit with respect to what  person is apt to consume, would be better used as a corrective of the tendency of wealth to further accumulate among the rich. In other words, just as banks with assets over $1 trillion are too big to fail, a billionaire getting richer may not be worth the “cost” to society in terms of the increased inequality—to say nothing of the probable compromise to a republic form of government (which can often be too easily bought).

In short, income and even accumulated wealth can reasonably be considered as applying generally to one’s life (and those of one’s kids and grandchildren) and more particularly to being used (i.e., spent). If one’s wealth vastly exceeds what can be spent on things one can consume, this might be an indication that the concentration has gotten out of hand, at the expense of society itself. In other words, if you have a bank account with a balance of $15 billion, do you really need $5 billion more?  Will you ever use it? There is an opportunity cost—part of which being contributing back to society and reducing the economic inequality. Even so, this way of thinking reflects a value on solidarity that is much more European than American, at least in terms of being valued. In other words, the typical American would be more likely to object to any limitation on economic freedom, even if the playing field is tilted in the direction of the wealthy being able to take disproportionate advantage of that freedom, irrespective of whether the additional wealth is usable.  

Sources:

David Gauthier-Villars, “Wealthy French Push for Extra Tax,” Wall Street Journal, August 24, 2011. 

Matt Krantz and Barbara Hansen, “CEO Pay Sours While Workers’ Pay Stalls,” USA Today, April 4, 2011. 

Sarah Anderson, “Executive Pay Debate Raging in Europe and the United States,” Foreign Policy in Focus, August 28, 2007.