Samuelson On CEO Pay
The Business Roundtable, a group of 160 CEOs, argues that a few huge pay packages create a distorted picture. Not really. Consider a Business Roundtable study, using data collected by Mercer Human Resource Consulting on 350 major companies. The idea was to examine median CEOs — those in the middle — as typical. Here’s what the study found:
— From 1995 to 2005, median CEO compensation at these companies rose 151 percent, from $2.7 million to $6.8 million;
— In the same period, the median sales of these companies increased 51 percent to $7.6 billion and the median profits, 126 percent to $591 million;
— By contrast, the median pay increase for full-time, year-round workers aged 25 to 64 in these years was only 32 percent to $38,223 (that’s all workers, not just those at the study’s firms).
Remember, these are run-of-the mill CEOs, not the superstars or the supergreedy. Even they seem to regard being a multimillionaire as an entitlement befitting their position. In 1995, the median CEO pay was 94 times median worker pay; by 2005, it was 179 times.
How CEOs are paid — their incentives — matters, for them and society.
Samuelson hints that the solution is in outside directors – WAY outside:
CEO pay has accelerated so rapidly mainly because it lacks normal disciplines. If you and I set our pay, we’d do well too. That’s essentially the CEOs’ prerogative. Some modest market pressures exist. In the 1990s, about a quarter of CEOs of big firms were hired from the outside, up from 15 percent in the 1970s. But CEO pay is mostly set by sympathetic directors, often other CEOs.
“Nobody has any idea what the right level should be,” Pfizer’s McKinnell told Fortune. True. There is no ideal way to set CEO pay. Any system can have bad, unintended consequences. That’s why the current CEO pay explosion is primarily a moral failure. Would Exxon’s Lee Raymond have worked just as effectively for $50 million, instead of $400 million? If so, he was overpaid. By that standard, so are many CEOs.
But they have contrived a moral code that exempts them from self-control — a moral code that justifies grabbing as much as they can. Because almost everyone else sees their code as self-serving and selfish, CEOs have undermined their moral standing and their ability to be taken seriously on other issues. They are slowly becoming a threat to the very system they claim to represent.
I still say that in America, only the market can decide these issues. Of course, it’s ridiculous to think that the CEOs deserve these outsize pay packages (99% of them, anyway). And it is true that there are enormous obstacles to forcing reform through shareholder activism. Nevertheless, it must be done, and in that fashion…
This is quasi-related…I’m a big fan of Somerby…
Samuelson is a Grade A goofball – the Thomas Friedman of finance (in fact, I think they share the same Moustache of Understanding).
“Primarily a moral failure?” Good grief, Charlie Brown. Who Moved my New Testament?
The best explanation of the failure of the stock option system, bar none, is in chapter 6 of this book. Fair warning: The author is a dyed-in-the-wool Marxist (that’s probably why his book is downloadable for free). But his analysis is rooted in mainstream economic theory and first-hand experience on Wall Street. Just ignore the “owning class” claptrap in the first few paragraphs; I guarantee you’ll find the rest interesting.
Also, check out this:
Yoiks.
I’ve always felt that Roger Enrico, the former CEO of PepsiCo, had the right idea regarding this issue. Enrico was one of the few CEO’s who had actually worked his way up from the shop floor (he started as a bottler’s assistant on the delivery trucks), and he used the 40x average worker’s pay as the highest level by which he should be compensated. That compensation, mind you, included his stock options as well as his salary.
No one paid any attention to him when he started criticising some the pay packages during the 90’s – and after he retired, he seems to have been entirely forgotten as one of the first CEO’s to alert the pubic to the “Imperial CEO” mindset that was beginning to be widespread among the Fortune 500 companies.
a moral code that justifies grabbing as much as they can
Are they talking about CEO pay or sports figures’ pay? Anyone want to guess at what Tiger makes each year. How about Jordan when he was at the top of his game? Now lets look at some of the news anchors? Don’t they get paid millions and millions of dollars? To do what? Present the news for a half hour a day on national television. Now there’s a job that contributes to society. Most are just a pretty face.
I build and repair wastewater treatment plants. I dare you not to flush your toilet. I doubt I have made a million dollars in my 32 years of working and I have 3 college degrees, 2 bachelors and a master’s.
I still say that in America, only the market can decide these issues.
This is a nice sentiment, Mark, but it’s far from obvious how the market can decide these issues. If CEOs are effectively setting their own pay, then there really isn’t much of a mechanism for the market sorting this out, other than maybe folks like you and me boycotting their firms. But if virtually every CEO is doing this, as Samuelson suggests, we’d have to blanket-boycott every firm. That can’t really be done, so I’m not sure how you expect the market to take care of this problem.
It’s got to be the shareholders, led by the big institutional investors….
Sorry, but it’s not clear to me that shareholders and big investors care in the slightest. Nor is it particularly clear why they would, at least from the economics/preferences/self-interest point of view. If you can present a compelling argument about how this is even workable, I’m open to changing my mind. After all, I’m not comfortable with the obvious and easy solution: government regulation. But I don’t see how this is fixable without some government interference.