CEO Salaries: Too Much on the Up-and-Up?

An article in today's New York Times examines chief executives' salaries, noting a gap between them and the paychecks of executives directly beneath CEOs.

According to the story:

As executive pay has surged in most American companies, attention has focused on the growing gap between the earnings of top executives and the average wage of workers in cubicles or on the shop floor. Little noticed, though, is how much the gap has also widened between the summit and the next few echelons down.

“It’s executive pay chasing executive pay,” said Mark Van Clieaf, managing director of MVC Associates International, a consulting firm that develops compensation plans. “But nobody looked at the issue of internal pay equity, so the disparity just kept getting bigger.”

Few are deprived in corporate suites, of course. But the widening disparities in business, which show up in a variety of other ways, reflect a dynamic that is taking hold across the economy: the growing concentration of wealth and income among a select group at the pinnacle of success, leaving many others with similar talents and experience well behind. ...

This even more skewed pattern at and near the top of the income ladder has become a sort of national standard. From 1985 to 2005, the incomes of taxpayers in the top 10th of earnings rose about 54 percent after inflation, to an average of $207,200, according to Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley.

But among the top 1 percent of taxpayers it increased 128 percent, to $812,500. And among the top 0.01 percent it nearly quadrupled, to $14 million on average. ...

Standard views tend to splinter between corporate apologists, who say that top executives have tougher jobs and are more deserving than in the past, and critics who accuse many of them, in essence, of doing little more than larding their pay at the expense of stockholders.

Home Depot

A MarketWatch.com story today reported on Home Depot CEO Frank Blake's thoughts on executive pay:

Home Depot Inc. Chief Executive Frank Blake, fresh from his first annual go-round with shareholders Thursday, said he believes the outcry over his predecessor's hefty pay package is part of a larger "societal shift."

Speaking to reporters after the annual meeting, Blake fell just short of defending whether former CEO Robert Nardelli deserved the rich compensation and retirement package he received.

Nardelli -- who was forced out of the top job in January because he refused to reduce his roughly $200 million pay package -- has been widely referred to as a poster child for excessive executive compensation. Though he was nowhere to be seen at the meeting, his name and legacy loomed large, drawing boos from shareholders at times.

"My view on Bob's pay issue is we're seeing a societal shift around what shareholders are willing to pay their CEOs," Blake said. "There are things that aren't acceptable now that were acceptable then."

What to Do?

The U.S. government has stepped into the fray, crafting regulations and legislation to improve the executive pay system. According to a February 2007 CRS report, such actions have tried to empower shareholders by: requiring disclosure of CEO pay that's easy to understand, making boards more responsive to shareholders, and mandating that shareholders directly approve executive pay.

The report also notes:

According to various observers, once on the board, directors are reluctant to press managers on pay because unless cordial relationships prevail, the board will find it difficult to function. This would help explain why CEO pay never seems to fall even though polls show that significant numbers of directors believe CEOs are overpaid: no one wants to be the first to cut pay.

Government reforms can help increase transparency in executive pay. But maybe lasting change calls for a combination of more diligent boards plus laws and regulations--a group effort, of sorts.

Do you think most CEOs' paychecks are bloated?

-kc

 

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