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Home Publications Blogs Beat the Press Corporate Directors Give Corporate CEOs Bloated Pay

Corporate Directors Give Corporate CEOs Bloated Pay

Sunday, 13 April 2014 08:00

In an otherwise interesting article on bloated CEO paychecks, the NYT almost entirely neglected the role of corporate directors. The directors are the people who determine CEO pay. It is their job first and foremost to hold down CEO pay in the interest of protecting shareholders.

As a practical matter, the directors rarely serve as an effective check on pay because they often owe their position as a director to the CEOs. They tend to view their directorships as a sort of sinecure, giving them hundreds of thousands of dollars a year for attending a small number of board meetings. Many directors serve on multiple boards, sometimes racking up over $1 million a year in the process.

This was the motivation for CEPR's Director Watch and its partner project with the Huffington Post, Pay Pals. Corporate directors are generally prominent public figures. (This is the reason they are selected.) These people fail the shareholders and really the whole country when they do not impose restraint on CEO pay.

How often at board meetings do they ask if they could get a comparably talented CEO from Europe or Japan, or even China, at a lower cost? Most likely this question is never raised, which means that corporate directors are not doing their job -- they are ripping off the shareholders in taking excessive pay while allowing the CEOs to write their own blank checks. 

Comments (8)Add Comment
Wink Wink Entitlement Pay for CEOs Generates Incentives for Huge Economic Losses
written by Last Mover, April 13, 2014 10:26

Furthermore the excess pay received by CEOs in this context can pale compared to economic damage they cause from incentives associated with such obscene excess entitlement.

For example the $80M bonus offered to the CEO of Time Warner contingent upon the merger with Comcast will incur economic losses in the billions in lost efficiency combined with increases in monopoly rent profit above that already collected by both companies.

Stunningly, the source of unearned excess pay for CEOs occurs in the same context these CEOs preach to the masses they don't deserve "unearned entitlements" from government ... as they collect them from the very board of directors who govern their own pay deemed as "entitled" ... wink wink.
Its a microcosm of our failing democracy
written by Dave, April 13, 2014 10:34
Shareholders are supposed to have the power to check this through their votes. Unfortunately, the same feedback loop of money and power that is eating our democracy is also eating away the voting power of shareholders of corporations.
I'm a smart investor
written by Anna Lee, April 13, 2014 11:50
And what smart investor would even consider being a shareholder of a company that doesn't think it's CEO is the best as exhibited by his/her compensation?
Oracles CEO incentive pay structure is surprising --not.
written by John Wright, April 13, 2014 11:58
In the article, Oracle's CEO pay is based on non-GAAP profits.

This is known as "Earnings before bad stuff".

From a societal and shareholder standpoint, basing CEO incentives on taxable earnings would move the incentives in a better direction as higher taxes paid and higher real earnings would be beneficial to taxpayers and shareholders.

These incentive pay packages seem to be sold on the belief that higher pay yields better results.

Of course that doesn't apply to "non-visionary" hourly workers.

But another question is do high pay packages indicate a structural issue with the companies themselves? Is there such an absence of talent below the CEO that very high CEO pay is necessary to compensate for the talent shortage?

What happens if the CEO is "hit by a bus"?

So high CEO pay could be evidence of a company that had neglected to develop its management structure.

The danger of a CEO’s double-dip
written by hadenough, April 13, 2014 12:01
A number of other high-profile CEOs sit on the boards of well-known companies: Netflix CEO Reed Hastings sits on the board of Facebook, as does Donald Graham, CEO and chairman of the Washington Post Co. Xerox CEO and Chairman Ursula M. Burns is a director at American Express and ExxonMobil. Apple’s board has Millard Drexler, the chairman and CEO of J. Crew, and Robert Iger, president and CEO of Walt Disney.

Can't find the stat but have seen around 60% of ceos sit on the boards of other companies.
8 trillion dollars in cash
written by Ellis, April 13, 2014 1:05
What do you expect companies to do with all their profits? They already pay out record high dividends and stock buybacks. And yet, they still have 8 trillion dollars in cash left over. That's enough to cover the entire federal budget for 2013, 2012 and three months of 2011, according to David Cay Johnston.

Profits are so high, they can't get rid of it fast enough. That tells me that they will have to raise their CEO pay even more next year.

Some may say that the entire system is irrational. But those people are nothing but a bunch of Marxist Reds.

corporate cash is funding the treasury!
written by pete, April 13, 2014 6:32
Keep in mind that corporate cash is invested in things like tbills. So getting rid of corporate cash means increased borrowing costs for the states and the federal government. Anyway, they should normalize the pay by corporate free cash flows. It looks a little less ominous then. Plus some of this numbers are one-offs, rather than continuing. Is Larry Page working for free? Buffett? Give me a break. Halving corporate pay might give pension funs and 401Ks another .01% or so per year. Whoopeee!
Directors work for the company
written by Daniel, April 14, 2014 8:41
Directors owe a fiduciary obligation to act in the interests of the corporation -- which includes employees, not merely shareholders.

Shareholders may well prefer overpaid CEOs -- even if it results in disaffected employees, lower productivity and a smaller economic pie, it also means that CEOs are more likely to see themselves as part of the .1% rather than American workers, and that makes them more likely to redistribute the smaller pie upwards. Moreover, it is hard for CEOs to maximize their extraction from the corporation without also handing a large part to the financial markets (shareholders).

Directors, however, are obligated to consider the interests of the entire corporation. Since Napoleon we've known that armies fight better when their officers are close to them. The same is true of corporations. High pay separates CEOs from the people they are supposed to listen to, motivate and lead -- and makes it far less likely they will be able to do so successfully.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.