When is enough enough?
Not content with providing CEOs with outrageous perquisites, such as free use of the corporate jet fleet for flights to golf or skiing resorts, boards of directors of the largest companies last year rewarded them with large pay increases.
According to a study conducted for the New York Times, the median pay for the top executives at 200 large companies was $10.8 million, an increase of 23% from 2009. By contrast, the average American worker's pay increased only 0.5% in 2010. Many of those workers saw the company 401(k) contributions halted during the recession and had their pay slashed or at least frozen.
Some CEOs received extraordinary salaries, and salary increases, in 2010. Leslie Moonves of CBS Corp. was paid $56.9 million, an increase of 32%. Philippe P. Dauman, CEO of Viacom Inc., was paid $84.5 million in 2010. Is any CEO worth $84.5 million a year?
To be sure, many companies had a good year in 2010. But the increases in earnings were most often the result of the economy improving in 2009 and early 2010, and the cost cutting forced on the companies by the severe recession that followed the mortgage meltdown. That cost cutting was not the result of brilliant strategic thinking by the CEOs. Further, revenues and share prices have not risen as fast as CEO salaries.
For boards of directors to grant — and for CEOs to accept — such large increases in already embarrassingly large compensation packages when the unemployment rate is 9.1%, when 13.9 million workers are unemployed and many more are underemployed and struggling to make ends meet, is unseemly. No one begrudges CEOs a comfortable life style, given their responsibilities, but who needs $10.8 million a year to live comfortably?
Some will argue that because of their responsibilities, guiding the fortunes of companies for the long-term benefit of thousands of employees and shareholders, CEOs must be well compensated. The president of the United States has far greater responsibilities and he is paid only $400,000 a year.
Others will argue CEO salaries are market driven, that boards of directors compete with other boards for the services of talented CEOs and have to pay the market price. But the market for CEOs is an inefficient market because information about what executive talent is available is not freely available. The list of possible candidates is determined by executive search firms, and even they cannot canvass the entire market. The inefficiency of the market leads to inefficient pricing, to CEOs' benefit.
Some will ask: What about top athletes? Aren't they paid like CEOs? Yes, but the worth of an athlete to a team is easy to gauge, and when his or her career is done, it's done. When a CEO fails, he or she usually retires to a number of well-paid directorships at companies headed by friends.
For the first time, shareholders this year had the opportunity to cast a non-binding vote on corporate executive compensation plans. A high percentage of those plans received shareholder approval, to which some will point as evidence that CEO compensation is not out of line.
But many of those votes were cast by institutional shareholders, who often are themselves highly paid, and many shareholders vote in favor of almost anything the board of directors proposes. If $10.8 million is the going rate for a CEO in an inefficient market, they may not want to hamper the board in attracting future management by pressuring it to reduce executive compensation.
The great danger is that excessive CEO compensation, especially at a time of economic hardship for many, will make ordinary Americans more cynical about corporate top management, and corporate America in general, and ultimately harm the American free enterprise system.
It's time for boards of directors and CEOs to show some restraint on compensation. If they can't do so, institutional investors will have to apply more pressure to bring about a change of attitude, perhaps by holding up to ridicule those who gain ever larger incomes while most workers lose ground.