|Coke and the Market for CEOs: It’s Not the Real Thing|
The Wall Street Journal came out with its annual survey of CEO compensation last week. To absolutely no one’s surprise, CEO compensation is up again. In 2013, the median pay for CEOs at 300 companies with revenue of more than $8.7 billion was $11.4 million, up 5.5 percent from 2012. This means that the gap in pay between CEOs and the rest of us is continuing to grow, as average hourly compensation rose just over 2.0 percent during the same period.
For those concerned about inequality the further rise in CEO pay is bad news, but defenders of these 8-figure paychecks are quick to say that this is just the workings of the free market. In that story, CEOs are getting paid what they are worth. Companies are willing to pay the median CEO $11.4 million because they add that much to the bottom line. The same holds for the real high-end earners like Larry Ellison who pocketed $76.9 million from his stock options at Oracle or Leslie Moonves who received $65.4 million in compensation from CBS. The argument is that these CEOs produce far more for the company than the person next in line if they were to leave.
According to the free market story of CEO pay, corporate boards of directors are constantly analyzing their compensation packages. The boards act to ensure that CEOs are paid in line with what they contribute to the company and not a penny more. Corporate directors also look to see if there might not be potential CEOs who are willing to work for less, not just in other companies, but in other countries. If there is a CEO is Germany, Japan, or China who could do the job as well and cost shareholders a few million less, the directors would rush to make the hire.
Yes, that is the way the market for CEOs is supposed to work. But we got yet more evidence that the market for CEOs doesn’t work anything like this last month. It turns out that the CEO and other top executives at Coca Cola have been giving themselves lavish bonus packages. According to the calculations of investment adviser David Winter, the bonuses issued last year had a value of $13 billion, which could rise to $24 billion over a two-year period. These bonuses would be shared among 6,000 managers, coming to an average $2 million per person per year.
This is a considerable chunk of money, even to Coca Cola. With profits of around $9 billion a year, these bonuses are comparable in size to the company’s profits. In other words, they should be of real concern to its shareholders since there is enough money at stake to hugely affect their earnings from the company.
This is why David Winter was happy that Warren Buffett, through his company Berkshire Hathaway, was one of the largest owners of Coke stock. Buffett had publicly condemned excessive CEO pay on many occasions. For this reason, Winter assumed that Buffett would be supportive of his effort to clamp down on the pay package that the top management at Coca Cola had awarded to itself.
Winter was wrong. Buffett apparently decided that he did not want to have a public spat with Coke’s management. He indicated that he was raising the issue privately with the management, and presumably persuade them to reduce the size of their bonuses going forward. But this meant that they would effectively get away with stealing billions of dollars from Coke by getting pay that was not warranted by their performance.
This episode is striking because if there was ever a situation in which it should have been possible to rein in excessive CEO pay, it was in the case of Coca Cola. In most companies stock ownership is diffuse, so there is no single individual who controls as large a share of company stock as Buffet does with Coke. Furthermore, Buffett does see excessive CEO pay as a problem, so he would presumably be more willing to take steps to limit compensation than most investors who don’t seem to have the issue on their radar screen.
Yet, when given the opportunity to take a strong stand against a pay package that he viewed as excessive, he did not want to have a public fight. Unfortunately, concerns over bad publicity never seem to be an issue when the topic is large-scale layoffs or shipping jobs out to other countries. It is only the publicity around excessive pay of top management that Buffett felt the need to avoid.
This is not just a case where we are seeing wealthy stockholders ripped off by wealthy CEOs and other top management. Much of Coke’s stock is held by middle class people with 401(k)s or pension funds. These people lose when top management rips off the company.
But pay for top managers in corporate America also has a spillover effect to other sectors. As a result of the exorbitant pay going to CEOs, top management in universities, hospitals, and even charities can count on pay packages that run into the high hundreds of thousands or even millions. Their top assistants have their pay scaled accordingly. In other words, excessive CEO pay is a big part of the story of growing inequality that we’ve seen over the last three decades.
In this sense Warren Buffett may have inadvertently done a major service to the public. He showed clearly that even in the circumstances where we would least expect it; CEOs can still write themselves exorbitant paychecks and get away with it. Those who believe CEO pay is determined in the market likely have had too much Coke.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.