A lot of good points here from all sides. Yes, a good CEO is worth a lot, but how much is a lot? and what is wrong with offering the workers stock options at the same rate per $ paid? and if the company goes belly up, aren't the workers entitled to the same golden parachute protection that the CEO is (again proportional to their pay?)
I like Dr Marty's idea of voluntary reporting of metrics, but to overcome the greed of these guys I think a bit more stick is necessary. Ratios between lowest / highest pay are a good idea and simple to implement. As are enforcing CEO pay rises be no more than the workers get. I recently got 2.5%, around the inflation figure so does not mean much, after a long fight, with the union threatening industrial action. Our CEO got 25% with no such struggle. "How to demoralise your workforce: 101".
Ad D. McCunney says, it would be meaningless to distribute the CEO's excess to the workers. But by mandating that all workers get the same stock options as the CEO, and putting that money towards the dividends, everyone has an incentive to do their best. Carrots alone don't work with greedy CEO's, some stick is needed.
I would rather see this question tackled in the context of Corporate Social Responsibility where organizations voluntarily publish key metrics. Examples could be the mode, median and mean salary of all employees with respect to that of the CEO (and executive team) but I'm sure there are probably other metrics too; or someone could even come up with an index that somehow munges all these metrics into a single figure that over time, would have some meaning.
Bert, I totally agree. I wouldn't want the job, but I can't complain too much about their salary. It does tend to be kind of like the government. You have the board and CEO making the rules and voting themselves raises. It is a gravy train until bad times, like when the company or country goes bankrupt. Then they have their golden parachute and the little people suffer.
Of course, board members tend to be top execs from other companies, also paid way more than the average worker, so it's not surprising that they scratch each others' backs.
Still, having the CEO of a company with ~100,000 employees or more paid a few hundred time more than the average worker means that it's not so much a question of his salary affecting negatively the workers' salaries. It's more a question of basic fairness, common sense, and you know, decency. Those intangibles.
I'd deteste doing their job, so I'm not envious by any means. A life of meetings, hustling, and gladhanding, doesn't sound appealing. I just don't want to hear them pontificating at me about ethics.
I am also of the opinion that the compensation packages of the CEO's in public companies should not be legislated by any government at all. Instead, the shareholders have that right to exercise. To that end, the SEC's proposed requirement to list the ratio of CEO's vs. median salary of employees is a good idea that can provide feedbacks to any shareholder action.
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.