Outlandish CEO Pay Is a Matter Between Friends

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Saturday, 26 April 2014 07:51

Joe Nocera documents what many of us already knew, the multi-million dollar pay packages of corporate CEOs are a matter between friends, not a market relationship. The specific context is the pay of the CEO and other top executives at Coca Cola.

The company has recently been in the news since an activist investor calculated it had set aside $24 billion for management bonuses over a two-year period. An amount that came to $2 million for each person in the pool. Nocera focused on the reaction of Warren Buffett to this news. As a result of his control over Berkshire Hathaway, Buffet is effectively one of the company's largest shareholders. Buffett has repeatedly complained publicly about outlandish CEO pay packages.

For this reason it seemed reasonable to expect that Buffett would use his shares to vote no when the pay package for Coke's top executive was put to a vote. However Nocera reports that he chose to abstain. Buffett's rationale, as relayed through third parties, is that it would have been too confrontational to vote down the package. Essentially Buffett said that he thought the pay was too high, but that he didn't want to make waves. He also acknowledged supporting other pay packages as a director that he felt were too high in order not to make waves.

This beautifully illustrates the dynamics of CEO pay. This is not a market relationship, it is a deal between friends.

When it comes to the pay of ordinary workers, whether clerks in a Walmart or factory workers in the auto industry, the question is always whether the company can get away with paying less. If lower pay means lobbying against minimum wage hikes or shipping work overseas, it will be done in a second, no apologies made. The story is that the goal is to maximize profits.

Yet, the same corporate board members who tell us about representing shareholders' when it comes to the pay of ordinary workers, somehow get all touchy feely when it comes to the pay of CEOs and other top management. This was the reason that CEPR started Director Watch and worked with Huffington Post on its Pay Pals site.

The corporate directors are the ones who most immediately need to be harassed. These are mostly prominent public figures (our list of directors profiled to date includes Erskine Bowles, Richard M. Daley, Elaine Chou, and Judith Rodin). They are paid six figure salaries to go to a small number of meetings a year. Their main responsibility is to ensure that management is acting on behalf of the shareholders.

When directors approve exorbitant pay packages even for mediocre CEOs, they cannot claim they are doing their jobs. They are essentially getting paid off to look the other way.  

 

Note: Typos corrected.