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Tuesday, May 10, 2011

CEO Compensation Increases: How Much Is Too Much in a Republic?

The medium value of salaries, bonuses and long-term-incentive awards for the CEOs of 350 major 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 with the absolute amount of 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.

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.

Click to add a question or comment on CEO compensation in the U.S.

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"