CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Op-Eds & Columns Corporate Governance and CEO Pay: The Cesspool at the Top

Corporate Governance and CEO Pay: The Cesspool at the Top

Print

Dean Baker
Truthout, April 17, 2013

See article on original website

Top corporate executives have always been well-paid for obvious reasons. Running a major corporation is a demanding job; you would expect to pay a high salary to get and retain talented hard-working people.

But in the last three decades, the pay of CEOs has gone from just being high – say 30 or 40 times the pay of typical workers – to being in the stratosphere. The pay of CEOs at major corporations now averages several hundred times the pay of ordinary workers. Annual compensation packages routinely run into the tens of millions of dollars and can run into the hundreds of millions of dollars.

Furthermore, CEOs generally can count on big paychecks in good times and bad. They tend to do well even when their companies do poorly; although they can expect to do better when corporate profits or stock prices rise. This is true even when their actions had little or nothing to do with the increase. For example, the CEOs of the major oil companies got incredibly rich as a result of the run-up in world oil prices in the last decade.

It is also worth noting that the eight- and nine-figure CEO pay stories are primarily an American phenomenon. The CEOs of large successful companies elsewhere, like Samsung, Toyota, and Siemens get by on a fraction of the pay of their less successful counterparts in the United States.

The fact that CEO pay often bears little resemblance to performance and that the upward explosion has not occurred to anywhere near the same extent in other countries, suggests that it is not driven by the natural workings of the market. The origins of the outrageous paychecks at the top can be more likely found in the failing of the corporate governance structure in the United States.

Corporations in Europe and Asia typically have a very different governing structure. They often have large institutional shareholders who actively police the conduct of the top executives, including their compensation.

By contrast, most CEOs in the United States don’t have much of a check on their behavior. The corporate boards who are supposed to represent shareholders are more often than not allied with top management. The board members themselves get fat paychecks in the hundreds of thousands of dollars for attending 4-6 meetings a year. They have little reason to seriously scrutinize the pay of top executives.

They are unlikely to ask whether they could get their CEO to deliver a comparable performance for 40-50 percent less money. Nor will they ask whether they can find a comparably qualified CEOs for much less money from Europe, Japan, or China. The questions that top management raise all the time on reducing worker pay to lower costs and increase profits rarely if ever come up in reference to their own pay, even though this is the job of the board.

This matters not only because excessive CEO pay may come at the expense of shareholders or even the health of the company; the outlandish pay packages for top executives helps to set a pay structure in which those in high-level positions in all institutions receive paychecks that are grossly out of line with ordinary workers’ pay. Top executives in universities, hospitals, even private charities, often draw salaries in the high hundreds of thousands or millions of dollars. This pay is justified by the fact that they could easily get more money running a business of comparable size.

The high pay for those at the top does not come out of the air; it comes from everyone else’s paycheck. The share of national income going to the richest 1 percent has risen by more than 10 percentage points over the last three decades. This has roughly the same impact on the living standards of ordinary workers as a doubling of all federal taxes.

There is no single policy that would reverse this enormous upward redistribution of income. A lower dollar to make U.S. goods more competitive would be helpful, as would a higher minimum wage and more balanced labor laws that allowed workers to join unions.

But reining in CEO pay has to be an important part of the story. One way to do this is to pressure corporate directors to actually do their jobs. Rather than being paid off to look the other way as top management pilfers the company, corporate directors should constantly be asking whether they could pay top management less or get comparable managers at lower cost.

To impose this sort of check on CEO pay, the Center for Economic and Policy Research, together with the Huffington Post, will be starting Director Watch. Director Watch is designed to highlight the abuses of corporate directors like Erskine Bowles. Bowles has pocketed millions as a board member of companies like Morgan Stanley, that would have collapsed without a government bailout and General Motors, which did collapse.

Bowles and his fellow board members feel that they can stuff their own pockets, while allowing top management to do the same, because no one is watching. While Director Watch will not directly prevent the sort of theft that characterizes the behavior at the top echelons of U.S. corporations, it will highlight the identity of the people responsible.

The point of Director Watch is to let everyone know that the Erskine Bowles of the world are not decent honorable types who warrant public respect, but rather key accomplices in the corruption at the top of corporate America. With Director Watch, someone will be watching.


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.

 

CEPR.net
donate_new
Combined Federal Campaign #79613

Op-Eds by Author

Mark Weisbrot

Dean Baker

Eileen Appelbaum

John Schmitt