Containing CEO Pay: A Case of Government Efficiency

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Dean Baker
Truthout, April 17, 2007

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The public is outraged over the enormous paychecks that are now standard for people who run large corporations. Compensation packages routinely run into the tens of millions of dollars, and it is no longer unusual for a top executive to walk away with hundreds of millions of dollars for their service. In fact, Robert Nardelli, the CEO of Home Depot, got paid $210 million to go away when the company dumped him for his failed turnaround effort. When it comes to CEO pay, it seems pretty clear that corporate America simply has no control.

By contrast, the government is a model of frugality. The president of the United States is paid $400,000 a year. Cabinet secretaries, several of whom oversee departments that spend hundreds of billions annually, earn $183,500 a year. The chief justice of the Supreme Court makes $212,000 a year, about the same as a mediocre lawyer at a mid-size Manhattan law firm.

Whatever one thinks of the current occupants of these positions, no one can dispute that they are generally very accomplished people. And, with perhaps one notable exception, they seem to work very hard at their jobs. In short, the government seems capable of attracting highly qualified individuals for salaries that are often less than one-hundredth as much as they would command in comparable positions in the private sector.

What holds down salaries for the honchos in the government? The answer is simple: democracy. The salaries of government officials are widely publicized, and the public has some control over how much these top officials receive. They compare the salaries of government leaders to the $30,000 to $50,000 that most schoolteachers earn, to the $40,000 that a factory worker might make in a year, or the $20,000 that a custodian or restaurant worker gets paid, if they are lucky. The six-figure salaries (plus benefits) earned by top government officials look pretty good to the vast majority of people who must get by on considerably less. Popular sentiment effectively limits the pay for those at the top in the public sector.

There is no comparable check on salaries for the bosses in the private sector. Effectively, top executives have their friends decide their salaries - corporate boards of directors, or a subset of the board, typically determine CEO pay. These are almost invariably hugely wealthy people who got placed on the board because of their ties to the CEO. They have little interest in holding down CEO pay, nor is it likely to even occur to them that this is an important goal. Corporate boards are rarely embarrassed by having overpaid CEOs. In short, when it comes to CEO pay in the corporate world, there is no effective budget constraint - the sky is the limit.

However, the experience of the public sector provides a route for containing CEO pay. The rules of corporate governance can be altered to require that compensation packages of top executives get the approval of shareholders at regular intervals. Also, unlike the standard practice for shareholder votes, in which management gets to count unreturned proxies as supporting their position, the vote on CEO pay should only count ballots that are actually returned - as in a real election.

Rep. Barney Frank, chair of the House Financial Services Committee, has actually proposed legislation that would require shareholder votes on CEO compensation. But under the Frank bill, the votes would be non-binding.

While this bill would be a step towards accountability, there is no reason that such votes should be non-binding. (It would be great if right-wingers would be as wimpy with their policy proposals.) The government already has a long set of rules for corporate governance, such as requiring a board of directors that is answerable to shareholders. The rules are i'tended to protect shareholders against abuses by insiders - the sort of abuses that we witness when incompetent CEOs get hundred-million-dollar compensation packages.

If the shareholders got to determine CEO pay, it is likely that their compensation packages would look a lot more like paychecks the rest of us earn. This is an area in which the private sector would become much more efficient if it learned from the government.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.