Apologies for having two Financial Times items in succession, but the FT all too frequently has the goods.
In a new item that so far had not been picked up by the Wall Street Journal, the Financial Times reports that a survey by the National Association of Directors found that two thirds of CEOs said CEOs were overpaid, and 80% of participating corporate directors agreed.
That of course begs the question; if there is collective agreement that CEOs are paid too much, particularly among the group that approves their pay packages, why does outsized compensation persist?
I can think of at least two reasons. One is that there is a well documented propensity for people to assume others are more biased than they are and will hew to those biases. For example, it turns out that members of selection committees for fraternities in the 1960s would turn down black candidates, not because they had any personal objection to them, but they assumed the others did. But it often turned out that a majority of members of not only the committee, but the club itself, felt the same way, yet too many were loath to bring up what they assumed to be a hugely divisive issue.
Second is that the survey was well designed. It did not ask “Are you overpaid?” That most certainly would have elicited a negative response. Depersonalizing the question yielded a more honest answer. Yet CEOs understand that their pay is set in relationship to the compensation of other CEOs. To get this negative a response when they know full well how the game works is quite an indictment.
From the Financial Times:
Most US corporate leaders believe chief executives are overpaid and do not provide value for money for their companies, according to a study that will embolden critics of excessive compensation.
The findings – to be published today by the National Association of Corporate Directors – are likely to strengthen calls by investors and politicians, including George W. Bush, US president, for restraint on executive pay at a time of growing income inequality in the US….
Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance.
Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”.
Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.
“There is an overall realisation that executive compensation is an area that boards and management are struggling with,” said Peter Gleason, chief operating officer of the NACD.
The issue is particularly sensitive because the gap between rich and poor in America has reached its widest point in more than 60 years.
Figures released last week showed the share of national income claimed by the wealthiest 1 per cent of Americans had reached 21.2 per cent – a postwar record – partly because of booming company profits.
Mr Bush last week told The Wall Street Journal that he thought some executive compensation was excessive and that some boards needed to improve their oversight of this.
Nearly 60 per cent of the directors polled by the NACD said the reason for excessive pay packages was the absence of objective ways to measure an executive’s performance. Nearly half criticised the use of options and equity awards that reward executives when the company’s share price goes up, rather than when its operations improve.
Investors have become more vocal in attacking what they often call “pay for failure” – large severance packages awarded to ousted chief executives.