I'm like most people, I suppose; we look at stories about wretched excess and think, this is ridiculous:
CEOs at larger U.S. corporations on average earn $430 for every $1 earned by the average U.S. worker.
Twenty-six years ago, CEOs received an average of $10 for every $1 earned by a U.S. worker.
Somewhere in that quarter-century, something went terribly wrong.
But we're being manipulated; such stories are an easy way to push our envy buttons. When the columnist writes that "a recent Corporate Library analysis shows CEOs at 11 of the largest U.S. companies were on track to receive a total of $865-million in pay, despite their presiding over an overall loss of $640-billion in shareholder value," he's not making a one-on-one comparison. To know how to really judge the compensation, we need to see how and individual company is performing and study that in relation to what the CEO is paid. (He does flirt with that concept in noting that Carly Fiorina got a $21.6 million severance package despite her "uninspired performance.") And note that he talks specifically about the "11 largest companies" and sometimes refers to "the largest companies." He's not talking about ALL companies.
It's also worth noting, as this defense of CEO pay does, that it's a little misleading to merely look at this year's bottom line when decrying outrageous CEO compensation. A good CEO looks (or at least is supposed to look) at a plan going out five years or longer. Some of this year's losses might in fact be deliberate as part of a long-range strategic plan.
Yeah, yeah, I know, the pay is still outrageous, no matter how we defend it. I also think it's outrageous that baseball players get multimillion-dollar contracts when their batting averages or win-loss record goes down, and I resent the heck out of all those obscenely rich rap artists. But a lot of people are willing to pay to see the baseball player or listen to the rap artist, so what's my real gripe? All these CEOs have boards and shareholders to answer to and customers they must please with their goods or services. If all those people are kept happy, it's no concern of mine. Even something as essential as petroleum products will ultimately bow to the dictates of supply and demand.
Anyone whose compensation is determined by others -- whether it's the guy serving you fries at McDonald's or the CEO of ExxonMobile -- is worth exactly what those with the purse strings are willing to pay, no more or no less.
Comments
I used to yawn when I heard complaints about CEO pay, too, thinking, like Mr. Morris, that any CEO (or any employee) is worth whatever someone's willing to pay her.
But in the real world, we don't have a free market in CEOs. There's such a disconnect between the owners of a corporation (that is, the shareholders) and the managers of the corporation, that it's nearly impossible for a given shareholder to exercise any influence over the board of directors, and thus over management. (For instance, although members of boards of directors are elected by shareholders, the simple fact is that shareholders usually rubber-stamp whomever management chooses to nominate.)
So you have boards of directors--"elected" by shareholders but usually *selected* by management itself--who determine salaries for CEOs. And, at least until recent reforms, a seat on a company's board was a swell gig, entitling one to a nice paycheck for very little work.
So you rub my back (by selecting me for a board) and I'll rub your back by making sure you're well-compensated. A further perverse incentive: many directors are themselves CEOs or other high-level managers at other corporations, so it is in their best interests to boost CEO and top management pay as much as possible.
Moreover, CEO pay is usually determinded by sending a consultant out to estimate the average pay packages of a CEO's peers. That estimate of *average* peer pay is then used as a *baseline* for negotiating CEO salaries. That is precisely why you see this ever-escalating CEO pay.
It ain't market forces. It's called cronyism.
I wish libertarians would turn their powerful critiques of government power on corporations, which are, after all, artificial *people* created not by free markets but by government power. Libertarians--at least the Reason magazine types--seem to have forgotten that.