Thursday, April 12, 2007

High CEO Pay

In recent years, there has been a lot of criticism concerning the salaries of Fortune 500 CEOs. The graph below from The Economist shows how much CEO compensation how grown relative to the average wage in the United States:

As you can see, the compensation for executives in major US corporations was around 30-40 times the wages of the average worker up until the late 1980s. Now, executives make over 100 times the average wage. You could also look at the largest compensation packages for US CEOs on this Forbes site, noting that the highest paid CEOs make a couple hundred million dollars for the year (this of course includes bonuses and stock compensation).

Some are particularly aghast at what CEOs make when their performance is poor. For example,
The Corporate Library, an American corporate-governance consultancy, last year identified 11 large and well known but poorly governed companies, including AT&T, Merck and Time Warner, where the chief executive had been paid at least $15m a year for two successive years even as the company's shares had underperformed. Robert Nardelli received a $210m pay-off when he lost his job earlier this month even though the shares of his company, Home Depot, fell slightly during his six years in charge. Carly Fiorina, ejected from Hewlett-Packard almost $180m better off—including a severance payment of $21.6m—after a lacklustre tenure as chief executive
What do you think about the increase in executive pay? Is it an outrage or is it fair? Should there be restrictions on how much a CEO can be paid? You may want to remember our discussion of labor markets and how marginal revenue product was the basis for how much someone should be paid.


Anonymous said...

It makes sense to me that all employees of companies that are really profiting and growing would probably be paid more highly than those of struggling or smaller firms. Where I begin to see a problem is in situations where the majority of employees who perform the menial labor and actual production tasks critical to the company's profit in the first place are paid dramatically less than its CEO. Granted, the CEO is supposedly the person in charge of the company's direction and future planning, so at least a portion of the company's success should be attributed to his leadership--but still, without a hierarchy of workers beneath him, he would have nothing to lead. Therefore, I see less problem with highly paid CEOs, as long as the other employees have proportionately higher salaries--it just seems to get out of control when those workers and consumers as well are penalized in order to provide an attractive package to a CEO.
-Nicole O.

Anonymous said...

I agree with nicole. I believe that CEOs deserve higher pay, yet it should be based on the company's perfomance. The CEO is the leader and, especially in larger firms such at&t, have a lot to manage. Yet there is a problem when the salaries of CEOs increase yet the earnings of the capanies they are in charge of decrease. Yet there are concerns about limiting a CEO's pay, as that would most likely descrease the incentive for a CEO to work harder and be more productive. I think that a CEO's pay should be high, I dont have a problem with that, but i think the company's earnings should reflect the huge investment it is putting into its CEO. If the earning should go down, the CEO should be penalized and receive less pay, just as he.she should be rewarded with higher pay if the earnings should go up.
-Andreas Wilder

Ames Tiedeman said...

We cannot sustain 800 bilion a year trade deficits. We cannot export our way out of this mess. The only answer is a sharply lower dollar to drive manufactruing home and to lower the trade deficit. The dollar has much farther to fall. What you are seeing is a long term effort (it will take 20 years) to get the trade deficit back under 1% of GDP. We are currently running a trade imbalance of nearly 6% of GDP. No nation can do this. The IMF would be stepping in to help any nation if its trade impalance went to 6% of GDP becuase its currency would collapse! The U.S. is different, but still we cannot sustain a trade deficit of this magnitude. People must understand, when we buy an item from say China, we pay in dollars. The Chinese company we just bought from them goes to an Exchange Bank in China and converts those dollars to Yuan. The Chinese banking system (Chinese Government) is now sitting on the dollars. They can either 1, buy oil, 2, buy Treasuries, 3. buy U.S goods, 4. buy U.S. Corporations, 5. other. Over time if we (the U.S. ) contiue to run a trade deficit we could simply be completely bought and controlled by foreigners. Warren Buffet has explained the situation as being like a rich Texas farmer who loses a small piece of his land year after year and never notices for a while. When he then notices, tragedy sets in because he no longer controls his land. So in sum, we need to get the trade deficit way down. This is why the Fed has abandoned the dollar. It wil be going down for the next 20 years. That is how long it is going to take to correct this imbalance mess.

Anonymous said...

Large companies want a high profile CEO. The supply of those available at any time is small. Thats a powerful bargaining chip when negotiating a contract. Would you request merit based pay and\or incentives be added into your contract if that was unnecessary?

MC Theron said...

I also agree with Nicole, but the biggest problem is not how high the salary is. It is the percentage of the raises they receive every year. All the strikes start, because of CEO that tend to get a higher percentage increase each year than the average worker. If everybody received the same percentage of increase the lower level worker would not be so agitated about the salaries of the CEO's.