Why Are American Executives Paid So Much?

My old boss Henry Waxman has just launched an intriguing new investigation: why, exactly, are American executives pulling in such stratospheric paychecks? CEOs and CFOs in the U.S. make 400 times what the average worker earns. In 1965, it was more like a factor of 20. One part of the puzzle: "independent" compensation consultants who might not be so independent. The SEC doesn't require companies to report on whether their compensation consultants also provide them with other services, so Waxman is asking six big consulting firms to self-report exactly what work they do for the top 250 Fortune 500 companies.

Why might the independent compensation consultants be not so independent? Well, not only did consultants from Hewitt Associates, for example, reportedly advise the compensation committee from Verizon's board of directors on just how and what to pay CEO Ivan Seidenberg, Verizon is one of Hewitt's biggest clients. In addition to the compensation work, Hewitt runs Verizon's employee benefits plans and advises the company on human resources. The argument goes that Hewitt's business relationship with Verizon is managed by the same executives whose pay it gets to decide on. (In 2005, Seidenberg earned $19.4 million in salary, bonus, stock and other compensation. In that same year, Verizon stock fell more than 25% and some managers' pensions were frozen.)

No doubt that people are starting to get a bit ticked off when executives earn such immense paychecks, especially when a lot of Americans are struggling to make ends meet. This is, I think, an issue with real momentum for Dems in 2008. Clinton and Edwards (in spirit, at least) have gotten behind Obama's bill that would allow the shareholders of public companies to hold a non-binding vote every year on executive pay, the way they do it over in England.

Waxman has asked the consultants to turn over the information to the House Oversight and Government Reform Committee by May 29th.

Tags: clinton, Edwards, Executive Compensation, Henry Waxman, obama (all tags)

Comments

16 Comments

Re: Why Are American Executives Paid So Much?

One major reason, IMO, is the large-scale conversion of executive compensation from a salary largely based in cash to one now dominated by equity compensation - in particular stock-compensation grants. It would be interesting if a study could be done of the salary garnered by an executive if the only considerations included are cash and options that were exercised during the year, as the numbers reported as compensation are merely the value reported as of the grant date - a value that can change (increase or decrease) over time. To me, that is the more relevant number to look at.

by PsiFighter37 2007-05-12 02:59PM | 0 recs
Market Check

Why do Boards of Directors of corporations use different models to hire CEOs than to sell the company off?  (Put another way -- wouldn't the Board's fiduciary duties to the shareholders require the same approach?)  Aren't both about maximizing shareholder value?  Then why not use the same system for both?  Namely -- Would the idea of an auction (or at least competitive bidding or a market check) for the CEO spot fly?  People make a big deal out of football players who eschew guaranteed comp in favor of performance-based comp.  What if we put the CEO spot up for auction/bidding and hired the best performer at the best terms for the company?  It seems it would have a salutary effect on shareholder value.  Assuming, that is, that the maximization of shareholder value is really what the high CEO pay is about. . .

by Flatiron Dante 2007-05-12 03:37PM | 0 recs
Outsource execs

I am sure companies can start grooming foreign CEOss as potential replacements for their exissting CEOs. Imagine the SAVINGS!!!

Naaah. Companies like to save only at the expense of their engineers and workers.

by Pravin 2007-05-13 09:02AM | 0 recs
Re: Outsource execs

It's not a matter of what the companies "like", it's what the law will impose.  The auction example is one that I believe is imposed by Delaware corporate law as a matter of fiduciary duty of the Board.  My point is that I don't understand why no one has made the argument that the law should impose a similar obligation on boards with regard to executive compensation.

by Flatiron Dante 2007-05-13 09:18PM | 0 recs
Re: Why Are American Executives Paid So Much?

No doubt that people are starting to get a bit ticked off when executives earn such immense paychecks, especially when a lot of Americans are struggling to make ends meet.

That's part of it.  But there's also the fact a number of top execs have been incompetent, some corrupt, and still they get the big paycheck.

One rationale for the immense compensation to execs is that they're responsible for the company doing well.  But when something goes wrong, their immediate reply is that they didn't know "this" or weren't aware of "that".  When someone is being paid some ungodly amount, you expect some accountability.

by workingclassanna 2007-05-12 05:19PM | 0 recs
Re: Why Are American Executives Paid So Much?

CEOs and CFOs in the U.S. make 400 times what the average worker earns. In 1965, it was more like a factor of 20.

To me, a more shocking way of presenting this issue is:

"In 2005, average total compensation for CEOs of 350 leading U.S. corporations was $11.6 million." A CEO making $10 million/year makes as much money in a month as someone working at the minimum wage makes in her lifetime. There is no reasonable justification for one person to make as much money in a month as another earns in a lifetime. No matter how smart, beautiful, refined, charismatic, brave, clever, educated, experienced, or hard working, no human being deserves to receive a thousand times as much money as another.

($10 million/year = $833,000/month; minimum wage = $5.15/hour = $10,712/year for 40-hour workweek = $535,600 for 50 years of work.)

by RandomNonviolence 2007-05-12 06:34PM | 0 recs
Re: Why Are American Executives Paid So Much?

I was recently part of an interesting debate aboput pricing in one of my last MBA courses and we got into this issue.  Regardless of the reasons or even for that matter the moriality of the issue, it became apparent that our overlal cost structure in American Business is so out of whack in terms of executive compensation that it is going to be high near impossible to compete in pricing is China and other countries continue to rise as we all expect they might.  

by Mark J. Bowers 2007-05-12 10:42PM | 0 recs
Re: Why Are American Executives Paid So Much?

Let us know when the minimum wage earner's skills are on parity with the CEO.  Most can barely run their own household, much less one of 350 large top corporations.  You focus so much on the distraction of the scandal that you do not see what the day to day work involves.  I assure you it involves a little skill than asking if fries are desired with that meal.

by shokk 2007-05-13 04:54AM | 0 recs
Re: Why Are American Executives Paid So Much?

Do CEOs have 400 times the skill of an average worker?

by jallen 2007-05-13 05:06AM | 0 recs
Re: Why Are American Executives Paid So Much?

Sorry, that should be "Do CEOs have skills worth 400 times that of an average worker?"

by jallen 2007-05-13 05:22AM | 0 recs
Re: Why Are American Executives Paid So Much?

Yeah, I mean they might be able to flip a burger but what's their handicap(golf, not bowling)?  

by msstaley 2007-05-13 06:40AM | 0 recs
Re: Why Are American Executives Paid So Much?

Could it be because they (or at least people in their same orbit) set their pay?

Teaching, policing, and fire fighting are only survivable by people with a passion, who don't want to do anything else. Employers have long since figured this out and make use of it to abuse and underpay them.

Who becomes an executive? Ignoring the crooked, incompetent (with the right degree / friends / pedigree), or purely venial, a good CEO is also passionate. I'm glad there are people that enjoy running companies: they're certainly needed, but I wouldn't willingly spend one day in the company of most of Don Trump's Apprenti. If a CEO-inclined person wants to get rich, he should do so by starting a company (which I admittedly couldn't do and don't care to try) or running one well enough to raise the value of the stock he bought. Oh, they expect us to provide the stock? Okay, stock options instead of a huge wage would work. Why should I feel confident about someone who obviously isn't about himself and/or the company!

How many would still be interested on those terms? And would you want anyone that wasn't?

by pauls101 2007-05-13 05:28AM | 0 recs
Delta executives

I am to the right of many over here on fiscal issues. SOmething is wrong in our country when even I begin to sound like a socialist activist on this issue.

I think one place to check out is DELTA AIRLINES. Pilots were overpaid, but management was EXTREMELY OVERPAID. The old management of Leo Mullin and his gang of thieves got paid obscene amounts of money for driving Delta to the ground, gave themselves golden parachutes, guaranteed pensions, ridiculous retention bonuses(while almost every one of them bolted as soon as they fulfilled the term to which they stayed on to "shepard" the company and "avoid" disaster). In reality, they were just biding their time to cash in these bonuses.  Grinstein came in, got paid well, but took a LOT less than a gangster like Leo Mullen. And he did a better job. So you do not need to pay someone an obscene amount of money to get the job done.

Another thing: the pilots pay. I really think that if Delta had more execs who behaved like Grinstein did in his recent tenure, then the DElta pilots may have felt more of an obligation to compromise on their pay. If I am an overpaid Delta pilot, maybe I too wouldn't feel like compromising when I realize it makes no huge difference in the long run and my management are making out like bandits.

I heard the AFL-CIO has a website up compiling a list of exec pay and deciphering some of the benefits thaat are not easy to understand for the lay person. It is about time they have done this. I think labor unions have done a shitty job in recent decades of keeping execs in check. Sure government hasnt made it easy. But they should have come up with an idea like this a while ago.

by Pravin 2007-05-13 09:00AM | 0 recs
The AFL CIO Executive Paywatch is impressive
I haven't spent much time on it, but it indeed paints a picture. Here's what it has comparing what was made by Verizon's Ivan Seidenberg with what other people take in -- Seidenberg's compensation in 2006 is equal to that of:

15 Nobel prize winners
56 average university presidents
53 U.S. presidents
86 AFL-CIO presidents 126 Chairmen of the Joint Chiefs of Staff
721 average workers
1,989 minimum-wage earners

For the sake of full disclosure, I do some consulting work with the AFL-CIO, but mostly around the Employee Free Choice Act.
by Nancy Scola 2007-05-13 11:40AM | 0 recs
Re: The AFL CIO Executive Paywatch is impressive

I'm not sure the issue isjust whether or not CEO's have skills that are equivilent to that much more than the average worker and indeed if we approach the argument that way (even if it is the issue) then I don't think that we are going to get anywhere.  If asked, I suspect that most CEO's might beleiev that they are worth the money that they make and perhaps even beleive that they need to make more and quite honestly this is not different from teh average American since, I suspect, most believe they are underpaid.  

Instead, I believe that it would be more prudent to approach the issue as a matter of competitive value.  How do we expect to continue to compete if we don't sink more moeny into R&D rather than into CEO compensation.  Consider this, both R&D and CEO value are largely an abstract value in that it is difficult to decipher how much value either sectors bring.  However, if the company does well won't the employees continue to enjoy inclining wages, benefits, and job security?  

by Mark J. Bowers 2007-05-14 04:33AM | 0 recs
Re: The AFL CIO Executive Paywatch is impressive

I think too many CEOs have a freaking GOd complex. I respect people like Gates(regardless of his less than admirable behavior in making Microsoft a semi monopoly of sorts) who earned money through equity in the company and shared gthe wealth with his employees rather than robber barons who are guns for hire, have no long term emotional investment in the company, feel like they deserve millions just for gracing the CEO post. Even a guy like Eisner who did a lot for Disney in the 80s was overpaid. I mean, he was getting paid royally every single year including the years when he was bad. Did Disney fall apart when Eisner left? No. Sometimes people need to get over the fact that every single CEO is indispensable. We got a lot of talented managers who are capable of replacing current CEOs.

by Pravin 2007-05-14 05:32AM | 0 recs

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