Do CEOs Deserve to Make 263 Times as Much as You?
Plato is said to have told Aristotle that no one should ever make more than five times as much as anyone else in a civilization. Of course, the Greek thinker also thought slavery had a place in society, but his distaste for disproportionate compensation has remained as relevant as when the philosopher was alive.
The financial crisis inspired a broadly felt sense that something must be done to better regulate the American marketplace. When that drive culminated in the 2010 Dodd-Frank Wall Street Reform Act, relative pay became a quick target as a symbol of an unhealthy economy.
The most recent numbers available from the widely recognized authority on the subject, the left-leaning Institute for Policy Studies, hold that the average CEO of the S&P 500 makes 263 times as much as the median of the company's other workers. (Power being handsomely compensated is not exclusive to the private sector; CNN reported this week that Congress paid staffers $6.1 million in bonuses from January to March -- all while the two chambers mulled a shutdown.)
Embracing the view that public shaming would be an effective antidote to disproportionate pay in corporate America, Dodd-Frank included a provision calling on companies to disclose the ratio by which its chief executive's pay compares to median wage in the company. But this past week saw the House Financial Services Committee vote to repeal the measure, with four Democrats on the committee joining all 29 Republicans. And the move is being applauded by advocates for America's executive pay model, even as they concede the glaring nature of the disparity.
"It's a hard concept for the public to digest," says Chris Crawford, the executive director of Longnecker and Associates, an executive compensation consultancy, in an interview with AOL Jobs. "But at the end of the day, it's an inconsequential piece of information that might make for a good sound bite. A board has to pay what it takes to get the Michael Jordans to run their company. Because otherwise you won't have any business at all."
Such a school of thought is largely based on anecdotal evidence. Experts such as Crawford say exposure to corporate culture leads them to insist that CEOs operate in a different labor market. The rationale is based on the observation that the fortunes of a company are so intimately tied to their performance. Moreover, the figure of executive compensation is used as a competitive marker between rival firms.
"It's a rare skill-set for a CEO," he adds. "If you have a CEO who adds accretive value, it spills down to everyone."
To further defend the so-called American executive pay model, experts point out the importance of incentivization: The more a CEO stands to gain or lose, the thinking goes, the more important the stakes will be for him to make sure his company performs. "This all may be a valid sociological discussion, but it doesn't belong in the boardroom," adds Ira Kay, managing partner for the Pay Governance consultancy firm.
But as much as titans of the corporate world defend their model, they must confront the public "optics" of such a situation, to make use of a term utilized by Crawford. At least 81 companies, including McDonald's and American Airlines, lobbied for the repeal.
The view that forced disclosures are an irrelevant distraction was voiced by members of Congress in support of the repeal.
"It creates heat but sheds no light," Rep Nan Hayworth, (R-N.Y.), was quoted as saying in The Washington Post.
Such a defense is couched, as Kay suggests, purely in the context of corporate America. But while the ratio for CEO compensation to average worker has grown from 42 to 1 in 1980 to the current 263 to 1, overall pay hasn't budged for 90 percent of the country since the 1970s, according to research compiled by Carola Frydman from MIT's Sloan School of Management and Raven Molloy of the Federal Reserve.
A society in which the less-well-off must try to survive alongside those making astronomically more can be defended, under certain circumstances, maintains a leading critic of executive compensation.
"If you tied compensation to output and performance -- then this is America. And there is a tremendous amount of sympathy for excellence," says Graef Crystal, a compensation expert and author of the 1991 book, "In Search of Excess: The Overcompensation of American Executives."
"It would be the old Babe Ruth story," Crystal told AOL Jobs. "When asked how he felt about making more than President Hoover, he replied that he had a better year."
But such a dynamic is not the current operating procedure, Crystal notes. Most boardroom cultures are resistant to true review of executive performance, with critics often finding themselves sidelined. The growth that certain executives claim credit for can have as much to do with the swings of the market as anything else. And the use of executive compensation as a means of competing with other companies, he says, shields it from criticism.
And CEOs have only strengthened their Teflon, he adds.
As a comparison, he offers the examples of Robert Crandall and Carly Fiorina. When Crandall was confronted with airline deregulation in the 1980s, as he led American Airlines, he was forced to cut costs, and included his own salary in the slashing. Fiorina's stewardship of Hewlett-Packard coincided with the burst of the tech bubble and also the halving of the company's stock performance. As the company cut its workforce in 2005, she was pushed out as well -- but was let go with a golden parachute package of $20 million.
"There are some good people," says Crystal. "And there are some pigs too."
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