Ah, yes. Another go around of the claim that CEOs are overpaid relative to the average worker, with claims it needs to be reined in almost certain to follow.
Such notions miss a few fundamental points.
First, value is relative. Something is worth what someone else will pay for it. That includes the worker's labor. The CEO's pay is negotiated when hired by the Board of Directors. The various Boards have been willing to pay that much. By that measure, the CEOs aren't overpaid, because the Boards are willing to pay those levels of compensation. You need to look at why.
Second, while the total compensation gets a dollar value, most of the compensation isn't money. It's shares of company stock, and options to buy more shares at a lower than market price. The assumption is that a CEO will be more strongly motivated by having a piece of the action. Those are assets that add to the CEO's net worth, but they don't become money unless and until he sells some stock. Many CEO contracts have restrictions on timing and amount of stock sales because sales can affect the stock price. How many times have you seen companies announcing stock sales by the CEO, giving the reason as tax and estate planning? The concern is that the market may see stock sales by the CEO as indicating lack of confidence in the company's prospects, with a corresponding desire to reduce exposure and take profits while the stock still has a higher price.
Third, you have to examine CEO motivations.
One is parity. We all want to be paid comparably to our peers. If we discover another employee in our company who does the same thing we do, with a similar level of training, experience, and seniority, is making a lot more than we are, we'll be unhappy. CEOs have similar feelings. If the CEO of a company sees the CEO of another company of similar size in the same line business gettig a substantailly better compensation package, he may have a conversation with his board about it.
Another is ego. It's a game. Money is how you keep score. CEOs are winners. The CEO pulling down pulling down $10 million a year is announcing "I'm one of the best at what I do. I'm so good, my company pays me $10 million a year to do it for them!"
Another is status. Once you get past the basics of survival, and you are healthy, with food on your table, clothes on your back, a roof over your hard, and some confidence that will continue, you concern shifts to how you are doing relative to others. What's your status? Every society has status, though how it is conferred it and what indicates it ewill vary. In our culture, material wealth is a status indicator. The highly paid CEO has commensurate status, and wants to preserve and increase it.
Now look at the Boards that are willing to provide those compensation amounts. Why do they do so? The larger the company, the smaller the amount of candidates available who can do the job. When the CEO slot becomes vacant, the Board committee who must choose a replacement has a relatively limited pool to choose from. They'll want to pick either an internal candidatewho was perhaps a direct report to the departing CEO and viewed as a potential replacement, or if they look outside the company, they'll look at someone who already is or was a CEO elsewhere, or a candidate to be one. When you have a tight job market with few qualified, compensation skyroclets, because they are competing for the best people.
The fundamental job of the Board of Directors is to hire and fire the CEO. They are elected representatives of the shareholders who collectively own the company. Their concern is to preserve and increase shareholder value, and they hire the candidate they believe can best do that. It's ultimately about the price of the stock. If the stock takes a nosedive during the tenure of the CEO, he's not long for the job.
Ulitmately, the CEO makes far more than the average worker because the folks who approve his pay believe what he does is worth far more than the average worker. Most workers in a company can be readily replaced if they leave, and may well get laid off and replaced by someone who costs less. Replacing the CEO isn't as simple or easy. A poor worker might damage a company. A poor CEO can kill it.
One unanswered question in calls for reining in CEO pay is what those calling for it think will be done with the money instead. If the answer is "distribute it to the workers as higher pay", dream on. It won't happen, and probably wouldn't be a good idea if it did.
You can argue that the current focus on shareholder value is misplaced and even damaging to the health of the company, and folks have: http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/
But as long as shareholder value is the metric by which company health is judged, what we see now will likely continue.
The SEC would only require companies to report the executive-to-average-worker pay ratio, to provide higher visibility into pay structure within the company.
Even if it was actually trying to legislate pay ratios, this is within the bounds of government responsibility, and executive pay has been ballooning at an obscene rate. Over the past 20 years, executive pay has increased greatly, while average wages for middle income earners has been flat. It is not so much about corruption as it is about laying down a social framework that is mostly fair and mostly beneficial to everyone.
How is it a free society when the Government tells you how much you can earn? The way a corporation is supposed to work is that the stock-holders determine the compensation and tenure of the officers. Of course, the process has been corrupted in many ways. My preference is for Governments to attack the corruption rather than legislating everyone's pay (yes, they will start with CEOs but they will eventually get to you and I.)
NASA's Orion Flight Software Production Systems Manager Darrel G. Raines joins Planet Analog Editor Steve Taranovich and Embedded.com Editor Max Maxfield to talk about embedded flight software used in Orion Spacecraft, part of NASA's Mars mission. Live radio show and live chat. Get your questions ready.
Brought to you by