CEOs of U.S. companies are fat, happy and overpaid -- and it's only getting worse
Executive Compensation is an explosive topic. Every time I post on it, I receive … well … “hate mail.” Vitriolic comments in the vein of “how dare I suggest limitations on compensation. It is un-American.” One gentleman wrote me and passionately described how, despite the fact that he was struggling along working two dead-end minimum wage jobs, he vehemently opposed any restrictions on executive compensation.
Let me try to clarify my position. There should be no, and I mean no restrictions on executive compensation. My point is that CEO’s, CFO’s, COO’s and other executives should earn those salaries. And when I say earn, I mean add value (however that is defined) to their enterprise. Value may come in many forms. Profit is certainly a good measure, but developing products for the future, adding employees, navigating through difficult legal and regulatory problems (in effect saving the corporation money and its reputation) are fine as well.
CEO’s of large companies are the stewards of an enterprise built over decades, with billions in hard and soft assets. These days, most large corporations often have an international presence to protect and grow, a diverse work force, plants and equipment, and perhaps most valuable, good will. A name, a brand, a reputation in their market that is critical to creating revenue. But they are stewards, and only for a limited time. They do not own the company. The owners are you and me and our parents, grandparents and children, mainly through an amalgam of stock and pension funds.
So my criticism of executive compensation is not the amount CEO’s make (one, ten, one hundred million, it’s all good). It is that those amounts do not appear to be linked to performance. And things seem to be getting worse.
The New York Times reported last week that executive pay rose 23 percent from 2009 to 2010. Was there a commensurate increase in profit? How bout dividends? And jobs? Did they create new jobs? Hardly, as unemployment figures continue to tick upward.
According to a study by the AFL-CIO of 299 S&P 500 Index companies, the average CEO made $11,358,445 in 2010 — 343 times the median income of a worker in his or her company. In case the $11 million figure isn’t shocking enough, Executive PayWatch reports that the income made by the average S&P 500 CEO last year could support 28 U.S. presidents, 225 teachers or 753 minimum wage earners. Phillipe Dauman, CEO of Viacom, topped the pay list this year at a cool $84 million. What did he do for Viacom? Hopefully for Viacom shareholders, he made billions. But on his salary alone, one CEO would cover the cost of nearly 1,800 new teachers.
One positive development on this difficult topic is more institutional scrutiny. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies to report the pay disparity between the CEO and the typical worker. With this new information, the AFL-CIO has created Executive PayWatch, a database of executive income, pay disparity ratios and trends in CEO pay. Europe is catching up, but the United States is still the world leader in giant pay gaps between CEO’s and the average worker. The average U.S. CEO earns double his or her non-U.S. counterpart, and the average European CEO-to-median wage earner ratio is less than one-tenth the size of the average U.S. pay gap. Is the U.S. CEO that much better?
I think not. They are simply lucky enough to play in a league that has not “run the numbers.”
Steven N. Berk has over twenty years of litigation experience spanning both the private and public sectors. His practice ranges from representing Fortune 500 Companies, to consumers. Steven is based in Washington, D.C. and founded Berk Law in May 2009....
