CEO’s are Overpaid – Get Over It
By Al McClain
A recent study by the Economic Policy Institute showed, that in 2005, the average CEO in the U.S. earned 262 times the pay of the average worker, and made more in one workday than the average worker earned in a whole year.
OK, so we’re all outraged. Outraged! In 1965, the average U.S. CEO earned 24x the average worker; by 1989 the figure was 71x; and by 2000 the figure reached 300x. Since then, there was a significant decline and now we’re back on an upswing, with the average CEO now earning almost $11 million per year. And, we’re outraged. Outraged! But, not really.
Typically, in a RetailWire discussion on a topic like this, there would be many postings at the unfairness of it all, how it’s trends like this that are ruining business, and on and on. But we can’t be surprised, or even outraged, because outrage can’t last this long, can it? This has been going on for a long time, and we all know it. And, CEO’s aren’t the only overpaid superstars around. How about entertainers, authors, and sports figures?
The recently released Forbes 100 Celebrity List showed that author Dan Brown earned $88 million in the most recent 12 months, to rank 10th overall on the “celebrity appeal” list, and earned attributes of “intelligent” and “talented.” (These are actual categories.) Kobe Bryant earned $31MM, with attributes of “physically fit” and “talented,” and ranked 25th. The rankings are really a hoot, if you’re looking for something to take your mind off CEO pay (click to view). Donald Trump – #12 – earned $44MM and gets attributes of “aggressive” and “confident.”
For further perspective on the issue, here’s an excerpt from an interview with Ken Lewis, the Chairman and CEO of Bank of America, in Saturday’s New York Times:
Q: How would you explain why Ken Lewis is paid the way he is and receives a $3.5 million annual pension?
A: We want to be very competitive in all of our compensation packages as it relates to the market. Quarterbacks get paid more than some other players. That’s the analogy. We are paying very competitive market rates. It’s nothing more than that. I know that we pay for performance. That’s the way it should be. I hate the fact that some have abused the system and have given all CEOs the black eye. I think we have a very appropriate compensation policy.
Moderator’s Comment: What companies (retailers or suppliers) would you cite as having great top management that is compensated well because they deserve
it? Are there “best practices” in terms of CEO and top management pay such as pay for performance or a maximum CEO to worker pay ratio that you’d recommend companies in our industry
adopt?
Rather than be “outraged” at CEO pay, let’s leave that to the pundits who solve societal problems. Instead, let’s look to CEOs in the retailing industry
who are well paid but are performing well and deserve what they make because they are driving successful companies that serve consumers well. –
Al McClain – Moderator
This survey and many like it, forget to paint the entire picture. Some of the highest paid folks in the industry are not the CEOs, but their team, especially the VP of Sales and Marketing. These folks at Microsoft and Oracle easily eclipse the CEO for the value and revenues which they bring to the organization. They are being compensated on a PFP program which is directly linked to their performance. All too often these survey’s forget that it is the team which achieves corporate performance, and that there are others on the team who are often better compensated, for better reasons than just stock performance or cost control. Either way, these folks are getting paid what the market will bear, and should be paid for the value which they bring to the organization.
I have absolutely no problem with highly paid executives. What I have a problem with is the way many of their salaries are calculated. Bill Gates deserves every penny he has earned. Sure it was a lot of luck in the beginning, but taking that chance is exactly what our economic model is all about. And when his company was riding on top, Microsoft did not forget who made them a success. What other company sends out free updates and is constantly creating better versions of their products that they offer to consumers for free (Internet Explorer)? Stock options are part of everyone’s compensation package at Microsoft and the health and retirement benefits are excellent. So when you measure the company on all aspects; shareholders, employees, customers, and society the company is a success and its CEO deserves his compensation.
But then there are the other guys. These are CEOs who continue to receive high salaries, whose management team receives benefits not offered to other employees of the company, whose products have fallen behind the industry average and who have opened up offshore shelters to avoid paying taxes. These are not CEOs who deserve reward.
Ultimately it is the Board of Directors who must decide what the CEO receives. Unfortunately, it is often too easy to “bribe” the compensation committee. But this is not new. We saw it years ago with “Barbarians at the Gate” and of course Gordon Gekko said it all, “Greed is Good.”
Michael S. Jeffries was paid about $4 million last year, according to the Abercrombie & Fitch proxy statement. His 1 million shares of stock, granted to him in 2003, become vested 12/31/2008, if he still is working for the company. That stock, worth about $27 million in 2003, is now worth over $57 million. So the stock more than doubled in 3 and half years. That’s why he’s worth it.
The issue is pay for performance. As Mr. Livingston said, if the CEO is performing well for the shareholders, more power to him/her. Unfortunately way too many CEOs get paid well whether they do the job well or not.
This is a provocative question since it assumes that CEOs and few members of top management are the sole reason of why the price of their company’s stock rises. That, of course, is true in a great many cases. But also consider this: When Jack Welch was running GE with his prime team the company soared. When Welch left GE and appointed his successor most of his management team left. In their new environments there have been successes and otherwise. For instance, Larry Johnson went to Albertsons, didn’t take it anywhere, then arranged to have it taken out and was handsomely rewarded for selling the once-proud company.
As for retailers, I feel that Costco has a good perspective. Their CEO is paid rather well … but so are the workers and the company is flourishing.
I now ponder this question: Is greed the spur of industry or the sphincter of the heart? It would seem CEOs – as well as sports types and their agents, entertainers and celebrities ala Donald Trump – believe in what Lord Byron projected: “So for a gentlemanly vice, I think I must take up avarice.”
The question is accountability – is the pay being earned? Economic studies have been done of the presidency of the United States, over decades, in terms of the impact of the presidents decisions. The answers are not definitive, but tend to support the idea that presidents are lauded or damned over issues upon which they had minimal influence. Stuff happens.
There are different theories of history, only one of which is the “key person” variety. But one would think businesses would be more definitive.
Most of us wouldn’t believe presidents of companies have no impact on their companies. For example, who would believe that Lee Iacocca had nothing to do with the turnaround of Chrysler, or that Jack Welch didn’t contribute in a major way to the long winning streak of GE? At the same time, losers like de Lorean and many others have been or were rewarded munificently again and again, for what?
The same is true in sports. Driving out all the razz ma tazz of hero worship, Billy Bean showed how rational management could win, without the ego busting investments. (See Money Ball.)
I’m not going to name names. Let’s just say if the company is successful and the employees, customers and stockholders are happy, then the CEO deserves every penny. I work for a lot of privately held companies and don’t have the first clue what the CEO earns. It doesn’t matter and I don’t care. All I know is the employees and customers are happy. When everyone is happy, no one cares what the CEO makes. But when things turn sour, one of the first things to criticize is CEO pay. For example, Winn-Dixie, the poster child retailer for failure, has a CEO who makes more than the CEO of Publix, the poster child retailer for success.
Ok, I will name names. Whatever Wegmans paid Robert Wegman, he deserved every penny. Any CEO who gives it all back after he passes on is a perfect example of a CEO who could never be overpaid.
I’m not sure I agree, Al. Just because a situation persists for even hundreds of years doesn’t mean it is right or good. Sports stars are part of an entertainment industrial-complex, as are movie stars and novelists. Entertainment is a fundamentally different activity than what executives of businesses are SUPPOSED to do. We give money to the entertainment complex to entertain us. We give money to (invest in) business in order to make money, based on the business providing life-enriching products and services to customers.
Underneath the executive pay structure are two very powerful cultural assumptions: 1. “Some people are more valuable than others,” and 2. “Executives control their organizations.” Scientific data does not support these assumptions, yet they can seem so “obvious” that it might even seem ridiculous to question them. Combine these assumptions with the fact that executives essentially determine their own pay, and you get a machine that can hardly be stopped. It’s quite flattering, to say the least, to think that you are a very powerful person whom your organization “must” have in order for the organization to survive; and when you have the power to increase your own pay, you can make yourself feel even more powerful. We are a great society, but we also have weaknesses that are so profound they have become sicknesses. The alternative to this unfortunate pay condition produces businesses that fundamentally vastly stronger, in so many ways, than traditional American organizations, even very large and “powerful” ones.