Saturday, June 19, 2004

American CEOs make too much money

Why you’re right:

1. CEOs are paid 300 times the average worker. While the average worker earned $517 per week in 2003, the average CEO for a large company earned $155,769 a week. In 1982 CEOs made just 42 times the average worker. (Business Week)

2. CEO salaries aren’t determined fairly. CEOs have their salaries set by corporate boards packed with cronies. Corporate boards are also “interwoven” – meaning that frequently CEOs set each others salary. According to New York Attorney General Elliot Spitzer CEO pay is out of control because it is a “rigged marketplace.” (Time)

3. Highly paid CEOs don’t perform better. According to Paul Hodgson, an executive compensation expert with The Corporate Library “in the vast majority of U.S. companies, the pay-performance link is not only broken, it was never forged in the first place.” A CEO can expect their salary to rise even if the company they are leading performs poorly. (Ivey Business Journal)

Why they’re wrong:

Some argue that because CEO pay is determined in the free marketplace it is fair. The problem with this argument is that it naively assumes a perfect market. But such a market doens't exist. There are few long-term performance measures used to evaluate CEO pay. And CEO salaries are not set by disimpassioned economists but by close associates who have a personal and professional interest in seeing CEO pay rise no matter how the company performs. (Ivey Business Journal)

A better idea:

Responsible companies should cap the ratio between the average worker and CEOs at 15-1 or less. The grocer Whole Foods, for example, caps their CEO's pay at 14-1 and still manages to be a very successful company. (Time)