How much money should a CEO make?
Ah, to be the head of a large American corporation... can you imagine what life must be like at the top?
- In 2007, the CEOs of large U.S. companies were paid in one day what the average US worker makes in an entire year. With an average pay of $10.8 million annually, over 364 times the pay of the average American worker. (Looking at median pay, however, brings the pay ratio closer to 179 to 1.)
- CEO pay has increased 45% in the past ten years. Contrast this with the fact that the federal minimum wage increase, which just went into effect, gives bottom-rung workers roughly 7% less money, in real terms, than they were making a decade ago.
Is this fair? Is it just?
I myself am ambivalent on the issue. On one hand, in a capitalist society, there really isn't any limit to how much money a person can earn, technically. And there are many cases in which the CEO of a company actually conceived of and founded the company - shouldn't such an individual have the right to make oodles of money from his or her ideas? After all, some of the biggest companies in the world were started in someone's garage or home office.
On the other hand, many of the CEOs at big US corporations did not build the company from the ground up. They might be immensely talented individuals, but do they deserve to be paid over $10 million a year, to say nothing of stock options, and perks like use of the company's jet?
What about poorly performing CEOs? And severance packages? How much should companies pay a CEO to leave? According to the Kellogg School of business, leaving a company can be as lucrative as heading it up. Look at the severance packages for the following ex-CEOs:
- Robert Nardelli (Home Depot) - $210 million
- Michael Ovitz (Disney) - $140 million
- Stephen Hilbert (Conseco) - $72 million
- Carly Fiorina (Hewlett-Packard) - $21 million
Is this money well-spent? Anyone who runs a small business in middle America would tell you that it doesn't seem logical to give more money to someone who is performing poorly just to make them go away. Can you imagine firing, say, someone who works for your home cleaning business because they've done a terrible job, and offering them several thousand dollars to never work for you again?
There are a number of economic factors that play into these scenarios, usually involving risk and stock volatility (a good but oddly apologetic article on the issue can be found here). Compensation packages are often meant to help protect the reputation of a departing CEO. According to the Kellogg School, "Research also suggests that companies offer incoming CEOs a greater amount of ex-ante severance pay when requesting a confidentiality agreement."
I'm trying to fathom what this really means. As someone who has signed countless confidentiality agreements without ever getting access to the coporate jet, what gives CEOs the impression that their discretion can be bought? When Fiorina left HP, her compensation package included "financial counseling". What kind of counseling do you need when you're walking away with $21 million? Put it mostly in savings?
Publicly-traded companies are run by corporate boards who determine a CEO's pay and benefits. Board members are usually experienced leaders from other large corporations whose expertise is called upon. However, many corporate boards comprise members whose individual goals often include becoming CEOs of major US firms themselves, so it is in their interest to provide lucrative (or excessive) compensation packages to the chief executive officer.
This has raised the question as to who, exactly, should decide how much a CEO makes? What if a company's employees had the right to vote on a compensation package for their leaders? Should a company's shareholders have a binding vote? Should there be a cap on how much an individual can earn?
I have no easy answers, but the question has been weighing on my mind as of late. What do you think?
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