I read a fairly interesting piece today which discussed the recent announcement from the White House of new guidelines on executive pay for companies who received bailout money. The article starrted me thinking about the reasons that people believe CEO’s make too much many and just how much is too much. You can read it as well here: http://blog.kld.com/kld/president-obama-limits-salaries-at-bailed-out-banks-investors-to-seek-say-on-pay-at-100-corporations-in-2009/
According to the AFL-CIO, in 2008 the average compensation package for a S&P 500 CEO was $10.9 million. A short look at each company shows a wide range around this average from only a few million upwards of more than 20 million. I will be the first to admit that $20 million is a huge sum no matter what job you are doing. Before we go crying off to big brother though, maybe we should take a look at just how much that really is and where all that money comes from.
In 2007, the CEO of Boeing Aircraft made about $14 million. That same year, Boeing made about $4 billion in total profits. I’ll let you do the math, but as a percentage of company profits, $14 million is not very much. This is only one example, but I am sure the same holds true for most other Fortune 500 companies. A company that makes a lot of money can afford to pay the big bucks to the guy with all the responsibility. Now, setting aside the whole total CEO pay issue, lets look at what those CEO’s make compared to their employees. After all, if a company is making enough to pay the CEO the big bucks, then the average employee pay should go up as well right? Well, not necessarily true as it turns out and this is where the real injustice is in my opinion.
In 1965, the average CEO of a large company made about 24 times what the average worker earned. By 2007, CEO pay had risen to 275 times that of an average worker. Over the last 40 years, we have seen the emergence of a class of top level managers who demand, and get far more in compensation than they rightfully deserve. Right or wrong, this is where we have found ourselves and I believe we can emerge from the other end looking much better without government intervention. More and more shareholder groups are starting to hold CEO’s accountable and reducing benefits packages. Keep in mind that the largest increases in CEO pay have taken place over the last ten years as this class of managers matured and took root. Most of these high paid execs are in their 60′s and likely will not be working much longer. Maybe if we cut their pay a little we can entice them to go ahead and retire and get out of the way.
Rich
6 Comments
How does the government intend to keep these businesses competitive when the top business minds in these particular companies will move elsewhere to get properly compensated for their efforts. Altruism is fine in fantasy land, however we are dealing with the harsh reality of a competitive business environment that is going to see the energy and intellect of these companies stripped dry.
Not sure who that Chris is, but he ain’t me. Rich you are starting to sound like me, and this is properly categorized as From the Center of Things.
I posted this as my status on Facebook the other day to see what kind of responses I would get, “The average CEO’s salary in the US is 475 times greater than the average worker’s salary. In Japan, it’s 11 times greater, in France 15, Canada 20, South Africa 21, and Britain 22.” The responses were about what I would expect, liberals were all about how unfair this practice was and many of the Republicans came out harshly in favor of a free market system without regard to these numbers.
Chris, strangely enough European and Asian companies stay competitive with American companies without this disparity, so why do you feel it is justifiable in our system.
Your argument against Rich is that the top business minds will remain at the helm of companies, to keep them competitive, if this trend is allowed to continue. Well, Secretary-General Angel Gurri of the Paris-based Organization for Economic Cooperation and Development (OECD) stated that, “Greater income inequality stifles upward mobility between generations, making it harder for talented and hardworking people to get the rewards they deserve, it polarizes societies, it divides regions within countries, and it carves up the world between rich and poor.” (http://www.msnbc.msn.com/id/27295405/)
Additionally Chris, in 2005 a study was done by interviewing 1,000 members of the American Economists Assoc. and 71% said that the income disparity that I cited above was unsustainable and that a redistribution of wealth was necessary to the sound advancement of our economy. 81 % stated that this was an appropriate action for our government to take.
I am not necessarily for that, but seeing as we all talk about accountability, don’t you think it is appropriate that the Captain of the ships that were saved from sinking because of the Governments intervention should offer up a portion (salaries are not included) their much-greater-than meager incomes because they failed to perform and otherwise would be on the streets without a job? It is technically a small price to pay in this financial climate.
Too many Chris’s here. Thats okay though, we always appreciate new readers here!
As much as I would like to stay on the far right with Toronto Chris and let the free market work its own magic on corporate salaries, I fear that greed will rule the day. I have absolutley no problem with anyone who makes a huge amount of money. I feel that everyone in this country has ample oppurtunity to gain as much success as they can within their own abilities. Not everyone has what it takes to manage a compnay, let alone a vast multi-national company. In short, everyone is allowed to rise to the level of their own incompetence.
That being said, the disparity between executive pay and worker pay is rather appalling to me. I am still hesitant to agree to governement controls though. Businesses need to be free to pay the right amounts to get the talent they need, but at the same time need to excercise some restraint.
It’s not about corporate restraint, it is about accountability, responsibility and outright greed. I am currently doing an analysis on CEOs from the Fortune 500 and their backgrounds, so I won’t comment right now about the benefits of their upbringing and station, but there is something to this generational issue I brought up. Those born of privilege are far more likely to end up in this role than anyone else, and the odds are intentionally stacked that way. There are those that can still break in to this club but the odds on that get longer and longer with each passing year.
Funny you mention that the odds get longer and longer. I am currently looking at just why that happens and if my thesis is correct, it isn’t going to be pretty. For now I will just say that I am very intrigued by Levitt and Dubner’s (Freakonomics) analyisis of Chicago Public School students. They concluded that a childs success does not hinge on enviroment (books, educational shows, etc…) nearly as much as their genetics. Children of successful people tended to be successful themselves. I’ll see where it takes me…
That stands to reason to some degree, the general factors such as intelligence and personality traits that result in the inner drive (i.e. Type A personality) have a genetic base. My bigger focus is to see the average origin of those that are CEOs for the big corporations. Freakonomics is on my list of reads, my sister in law loved it.
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