How Much Do The Bosses Get Paid?

Forbes reported that, on average, America’s top 500 CEOs were paid $10.9 million a year in 2005, up from the $6.6 million in 2004. CEOs’ 2005 average earning was even higher than their average earnings of 2002, the end of the biggest bull market in U.S. history (Forbes). Despite Congress’s enactment of the Sarbanes-Oxley Act in 2002 and shareholders’ demand of more transparent in executive pay packages, compensation of corporate executives continue to climb. Through his article “Scandal Fallout: Tougher Evaluation of CEO Pay,” Jeffrey McDonald presented a few points of view in this controversial issue.

According to McDonald’s interviews with several compensation consultants, the new trend in executive pay is the customized performance-based compensation. In addition to the traditional financial performance, corporate boards added social performance to the evaluation of their executives.

Of course, the opponents, mostly chief executives, claimed that detailed requirements on executive performance evaluation would result in micro-management by the board of directors. Elected by the company shareholders, corporate boards are suppose to be the representatives of the shareholders and should play a vital role in overseeing corporate governance. However, the boards of directors of many public-held companies have taken a laissez-fair approach to their management oversight responsibilities. The corporate executives thus are given great freedom in their business conduct and an ever-increasing power. In fact, many CEOs of large multinational corporations have more influences than the leaders of some developing countries. These CEOs claim that corporate oversight would reduce operating efficiency and cause restriction in maximizing profitability.

Yet others are very concerned with the social effect of excessive executive compensation. McDonald cited a study conducted in Australia in 2000. Through that study, Professor Diane Swanson presented an inverse correlation between executive pay and their ethical standards. Such negative correlation confirmed that excessive executive compensation often results in minimal level of ethical conducts in the corporate corner offices.

Economists insisted that employee compensation, including the CEOs’, has a “market value,” which is a result of supply and demand of the labor market. Though we agree that employee compensation is, to a certain degree, the result of supply and demand, however the CEOs’ compensation in corporate America is much higher than their counterparts around the world. For examples, the average compensation of CEOs in the United Kingdom was ₤2.4million (approximately $4.6 million) in 2005 (BBC news)—maybe we should source our executive labor using foreigners. This should quickly tell us how committed our American executives are to out-sourcing jobs.

Others claim that high executive compensation is a result of the competition with searching for top management talents. As the pay packages rise in the private equity industry, many believe that executives may move to private equity firms if they are denied their high compensations. However, the private equity portfolio managers receive most of their lucrative earnings through company stock options; thus, their pay is closely tied to their performance in managing the portfolios. On the other hand, many CEOs receive their million-dollar compensation package even when they are terminated by the companies—the result of a “golden parachute” clause in their employee contract.

Of course, determining how the executives should be evaluated and how they should be compensated is a complex issue. Historically, corporate managers were only required to have a fiduciary duty to their shareholders. Today, businesses realized that, not only are they responsible for providing an acceptable return for their investors, they also have a social responsibility to the community in large. The new concept of corporate stakeholders included everyone who has a “stake” or interest in the corporate development—employees, suppliers, creditors, and government all have a different interest in the corporation’s success. How to balance the interests of the owners/stockholders and the other stakeholders requires tactics and considerations.

Certainly, most of us desire a cleaner environment, a well-paid job with a reasonable work/life balance, and a heft retirement account if we have extra money and invest it in the stock market. Executives are required to make all these things happen while still following laws and regulations, satisfying the creditors and other stakeholders, thus making the executives’ jobs much more challenging. In addition, good CEOs do have a positive impact on the companies’ performance; as a result, they probably deserve to be paid higher than the workers on the assemble lines. However, in June 2006’s “Economic Snapshots” that issued by the Economic Policy Institute, a nonprofit and nonpartisan think tank in Washington DC, stated that the ratio between the average CEO compensation and their worker’s pay is 262 in 2005, up from 238 in 2004. The same number was 24 in 1965 (Mishel). Though we agreed that the executives work harder and their jobs are more demanding than their employees are, the question arose: do executives really work 262 times harder than their employees? Many studies found that high executive compensation, with an extreme contrast to the compensation of their employees, causes low employee morale, worker resentment, and low productivity, especially in an economic downturn.

In contrast, many well-performing CEOs receive moderate compensations while providing high returns to their investors. For example, James Sinegal, the CEO of Costco Wholesale, received a salary of $350 thousand when the industry average was $1.0 million. His total compensation, in 2005 was $578 thousand when the industry average was $3.5 million (James). How much money can someone spend when he makes more than $100,000?--that was the question Mr. Sinegal asked during an interview with 60 Minutes.

Harvard Business School Professor Rakesh Khurana found that excessive CEO compensation is one of the investments that provide the least return for corporations in United States (Executive Compensation). Additional research found that several high-paid executives were also involved in recent accounting scandals, such as Dennis Kozlowski with Tyco International, Bernie Ebbers with WorldCom, and Kenneth Lay with Enron.

The truth is that effective executives do make great profits for their investors; they also provide jobs to employees and add wealth to the society. However, excessive executive compensation not only is an easy path to fraud and corruption, it can also cause social instability by widening the gap between the rich and the poor, which will ultimately shake the foundation of economic development for any country.

Work Cited

Bosses’ pay rise beats workers’. 02 Oct. 2006. BBC News 7 Mar. 2007. http://newsvote.bbc.co.uk.mpapps/pagetools/print/news.bbc.co.uk/2/hi/business/5397752.stm.

DeCarlo, Scott. What The Boss Makes. Forbes. 20 Apr. 2006. 6 Mar. 2007. <http://www.forbes.com/2006/04/20/ceo-pay-options-cz_sw_0420ceopay_print.html>.

Executive compensation. Wikipedia, the Free Encyclopedia. 23 Feb. 2007. 6 Mar. 2007.

James D. Sinegal, CEO of Costco Wholesale (COST), Earns $578,016. Forbes. 8 Mar. 2007. <http://www.forbes.com/static/execpay2005/LIROAMI.html>.

Mishel, Lawrence. CEO-to-worker pay imbalance grows. 21 Jun. 2006. Economic Policy Institute. 6 Mar. 2007. <http://www.epinet.org/>.