The next few days will feature a series of Corporate Observer Special Reports on Executive Compensation. Please enjoy Part I, on why Americans put up with staggering executive pay numbers year in and year out.
The Bureau of Labor Statistics concluded that in 2009, income among workers (defined as everyone who is not a CEO) grew by a mere 2.1% while CEO income grew at the robust rate of 27% — over 10 times that amount.
Let’s begin the story with the the numbers:
First, a macro view: The Bureau of Labor Statistics concluded that in 2009, income among workers (defined as everyone who is not a CEO) grew by a mere 2.1% while CEO income grew at the robust rate of 27% — over 10 times that amount.
This continues a disturbing trend where CEOs of United States-based companies continue to distance themselves from worker pay. The CEO-to-worker compensation ratio is about 300 to 1 and growing. Think about collecting 300 paychecks every week.
In Europe and Asia, the ratio is far smaller, often less than 100 to 1. For example Albert Meyer, an expert on Executive Pay, invests in Statoil, which pays its top nine executives combined less than half as much as ExxonMobil pays its CEO Rex Tillerson ($8.2m and $21.7m, respectively). Yet since it went public in 2001 Statoil’s stock has performed nearly twice as well as that of ExxonMobil.
What’s the impact of all that pay going to the executive suites? Simply put, it results in “the rich get richer and the poor get…" Well, you know.
This disparity was eloquently described by Mr. Meyer, who was featured in a Sunday piece by Gretchen Mortenson:
“Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs… There has been a massive wealth transfer from middle-class America’s retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny.”
Illustrating this pay disparity on an individual company basis drives home the point that a crisis could well be brewing.
In a recent CEO pay survey published by the Wall Street Journal, Phillipe Dauman of Viacom headed the list with a 2009 compensation package of $84.5 million for a mere nine months. On an annual basis that level of compensation would top $100 million.
But my favorite example of trouble brewing is the “mere” $20.2m awarded to AT&T CEO Randall Stephenson. Despite AT&T’s poor performance during that period, Mr. Stephenson remained high on the charts for CEO pay. Specifically, while the S&P 500 (of which AT&T is a part of) rose over 26%; AT&T’s stock value dropped roughly $2.00.
The question is why? Why are we so generous to the point of irrationality with our payment to CEOs? I don’t have all the answers, but shareholder groups — the folks that own AT&T and Viacom — have to step up and scrutinize these salaries. The Dodd-Frank Act’s Accountability and Executive Compensation section explicitly bestows this power upon shareholders.
We must reward those who actually add value to the enterprise and its stock price, not just those sitting in the biggest offices. Common sense tells me this staggering disparity between CEO and worker pay is not a good thing for an economy that must compete in a highly competitive global marketplace.