Absurd CEO compensation via stock to "align" management interests with supposed shareholder interests got a huge boost from the equally lame concept of "maximizing shareholder value", which is also finally getting some overdue scrutiny:
I'll give you my explanation, which explains why the explosion occurred. In one word: Reaganomics, which is based on the Trickle-Down (on) Theory. The theory is that if you make the richest people even richer, they'll have more money to spend and that will provide more money for everybody else. The problem is that if you give money to people who have so much that they can't spend what they already have, they're not going to spend more. They'll just add it to the big vault and swim in it like Uncle Scrooge McDuck.
If you give ordinary people 10% more money, they'll be able to afford to eat in restaurants more often -- say an extra once a week. This creates restaurant jobs, and the people with those jobs have more money to spend on other things like haircuts and cars, and before long all boats rise with the tide.
If you give people with tons of money 100% more money, they'll be able to afford to eat a fancy dinner in a fancy restaurant every five minutes. But of course they can't, so the money goes in the big vault (fancy a swim?) and people end up unemployed.
I've yet to hear a credible explanation justifying why the USA CEO/worker ratio has exploded by 10x since the 1960s, with most of that since 1990, or why they are paid about 2x more than their foreign counterparts. Are contemporary CEOs 10x more talented than their predecessors? Are American CEOs so superior to European or Asian ones? Is running a company 10x harder than 50 years ago? Foreign companies don't seem to have trouble finding capable CEOs at much lower pay levels.
There is more than basic fairness at stake. Like excessive risk taking, empire building and general short term orientation to increase stock prices, no matter what. When you read studies stating that between 66% to 75% of mergers and acquisitions fail to pay off, or that diversifying beyond core business so often ends in disaster, just how "efficient" is business, really? When I see vast sums squandered on acquisitions neglected into oblivion, or white elephant projects that go nowhere, no wonder worker pay has stagnated.
I noticed that the graph on page 1 is logarithmic and inflation adjusted. Just about anything that could ethically be done to lessen the peaks. Go to a linear scale and do not use inflation adjusted dollars and it becomes even more depressing.
@krisi. I am not advocating for a reduction in CEO pay - in fact, I am against it as I mentioned earlier. Maybe the phrase "flatten the pyramid" is a bit misleading. What I indeed meant is, pushing up the base of the pyramid, creating some compensation traction that prevents a segment of the pyramid from breaking away and leaving the rest behind.
And a CEO that controls the HR in order to gain advantage at the expense of the rest of the company is not fit to be a CEO either.
It should be said to such a CEO - what's happened to your preachings about 360 feedback, what's happened to your mantra about the virtues of good leadership? ...
If you want to make more money, then you shall do it carrying the rest of the company along ...
HR listens to CEO...nothing will get done, I guarantee it...there are very few CEOs that wants to make less money...and if you have characetristics like this in you that probably disqualifies you as CEO ;-)
I agree it is easier said than done. However I do think each organisation will have to address the issue by being transparent about compensation ratios within the company. This responsibility could lie within the HR unit.