New Study Debunks Myth That Exorbitant CEO Pay Results from “Talent”

In the last month or so, I’ve seen some remarkably dubious studies flogged around what Lambert calls the Innertubes, all ringing changes on the same themes: outsized pay for those at the top is a reflection of a state of nature. Power laws in pay are to be expected and therefore the winners are deserving. Cathy O’Neil shredded one example of this type of propaganda research. A more recent one, that I could not even bring myself to shred because I thought calling attention to it would serve to dignify it, tried claiming that the rising pay disparity between CEOs and average worker wages was due to the pay levels of CEOs at….hold your breath…”super companies.” A professor who does heavy-duty statistical work who looked at the study confirmed my reading: “It’s basically junk.”

Lawrence Mishel and Alyssa Davis of the Economic Policy Institute have not only gone after that junk paper, but with it, the general issue of whether ever-excalating CEO pay is justified. A new report focuses on the fact that rising executive pay has been a significant cause of the doubling of the income share of both the top 1% as well as the top0.1%. Let us not forget that CEO pay drives a host of other pay levels: other C level execs, board members, and advisors to CEOs like top consultants and top law firm partners (it’s unseemly for them to be seen to make more than their clients, so rising executive pay gives them an umbrella for charging more).

The study is clear and forcefully argued. Key points from its summary:

Over the last three decades, compensation for CEOs grew far faster than that of other highly paid workers, i.e., those earning more than 99.9 percent of wage earners. CEO compensation in 2013 (the latest year for data on top wage earners) was 5.84 times greater than wages of the top 0.1 percent of wage earners, a ratio 2.66 points higher than the 3.18 ratio that prevailed over the 1947–1979 period. This wage gain alone is equivalent to the wages of 2.66 very-high-wage earners….
.
That CEO pay grew far faster than pay of the top 0.1 percent of wage earners indicates that CEO compensation growth does not simply reflect the increased value of highly paid professionals in a competitive race for skills (the “market for talent”), but rather reflects the presence of substantial “rents” embedded in executive pay (meaning CEO pay does not reflect greater productivity of executives but rather the power of CEOs to extract concessions). Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on output or employment.

Critics of examining these trends suggest looking at the pay of the average CEO, not CEOs of the largest firms. However, the average firm is very small, employing just 20 workers, and does not represent a useful comparison to the pay of a typical worker who works in a firm with roughly 1,000 workers. Half (52 percent) of employment and 58 percent of total payroll are in firms with more than 500 or more employees. Firms with at least 10,000 workers provide 27.9 percent of all employment and 31.4 percent of all payroll.

The entire paper is very much worth reading. It has a lot of solid lower-level arguments and evidence. For instance:

The alignment of CEO compensation to the ups and downs of the stock market casts doubt on any explanation of high and rising CEO pay that relies on the rising individual productivity of executives, either because they head larger firms, have adopted new technology, or other reasons. CEO compensation often grows strongly simply when the overall stock market rises and individual firms’ stock values rise along with it (Figure A). This is a marketwide phenomenon and not one of improved performance of individual firms: most CEO pay packages allow pay to rise whenever the firm’s stock value rises and permit CEOs to cash out stock options regardless of whether or not the rise in the firm’s stock value was exceptional relative to comparable firms.

I have one small quibble with this otherwise solid and important paper. Mishel and Davis correctly describe excessive CEO pay as rents but they fail to describe the mechanism by which these rents are extracted. The main one among public companies is breathtaking simple and is guaranteed to make sure that top executive keeps rising at a rapid clip. From a 2008 post:

While most commentators on CEO pay correctly focus on the role of options-based rewards in goosing pay from generous to stratospheric, the role of compensation consultants seldom gets the attention it merits.

One practice that I have seen get perilous little mention is where the pay targets are set. Based on their belief of what constitutes good modern practice (influenced in no small degree by the pay consultants) most boards set general target ranges for how they would like the CEO to be paid relative to peers. The comp consultant then helps define and survey the peer group’s pay ranges, setting a benchmark for how the CEO in question is to be paid.

That all sounds fine, right? Well, except just as all the children at Lake Woebegone are above average, no board likes setting a target below peer group norms. I have heard of numerous examples of targets being set somewhere in the top half (66th percentile, top quarter, top 20%), hardly any at the mean, and none I know of below average (although GE’s Jeff Immelt set his pay at a remarkably modest level, saying it was bad for morale and inappropriate for the CEO to be paid vastly more than other C-level executives). If readers know of any examples of companies (other than those with substantially owned by insiders) where the target for CEO pay is below the median of comparable companies, please let me know.

So with this mechanism in place, any CEO who has fallen below median pay who is targeted to be in a higher group will have his pay ratcheted up, independent of performance, merely to keep up with his peers, This increase raises the average and creates new laggards. The comp consultants have institutionalized a leapfrogging process that keeps them busy surveying competitor reward levels and keeps top-level pay rising relentlessly.

And there seems to be a creep in cultural values that accepts, nay endorses, the opposite process at work further down the food chain.

And as we pointed out in that post, we have a double standard as far as other workers are concerned:

Consider the way in which views that are contrary to most wage earners’ interests have been internalized (or at least are promulgated in the media). One meme I have noticed surfacing in the debate over the automaker bailout is that UAW employees are paid more than average workers.

Now in and of itself, that statement is meaningless. You need to have an idea of worker productivity to see whether that it out of whack (and for some odd reason, the bloated and highly paid management cohort almost never gets mentioned in these discussions, nor do the massive state level subsidies to the foreign transplants). Perhaps I missed it, but I do not recall seeing any longitudinal work on labor costs (that sort of analysis would help bring some badly needed facts to the table).

But why is framing the discussion around averages alone dangerous? Let’s say we collectively want to bring car worker pay down to some sort of average. That has the effect of lowering the average. You will have groups that were formerly at the average that are now above it. And if you accept the implicit logic “above average pay is bad” (fill in the blank as to why), you have a race to the bottom due to pressure on the relatively better paid to take less which puts pressure on aggregate pay.

And once you understand how that logic is put into practice, you can see how it is put into practice on all sorts of other fronts: attacks on teacher pay and benefits as “too high” now that wages and job stability for private sector workers have been badly eroded. Or as we pointed out, Greek pensions are assailed as “too high” when it could just as well be argued that pensions in other Eurozone countries have been cut too far and should be increased instead. But playing on jealousy is remarkably effective, and workers will need to recognize how easy it is to set different groups who could make common cause off against each other to distract attention from the puppet-masters who make out even better than before.

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63 comments

  1. Disturbed Voter

    Where does the actual talent of CEOs reside … in grifting? Without a reform of the boards of directors, in an environment of annoying but impotent government regulation … where else can corporate governance reform come from? Whatever systems of governance as may be tried … doesn’t it always come down to the character of the people involved, or rather their lack of character?

  2. Jack King

    The real reason for the escalation of CEO pay is largely ignored in the article. It is really caused by an activist congressman who wanted to decrease the spread of CEO pay…ergo a little known law was passed in the mid-90s which stated any pay that exceeds $1 million cannot be expensed on the corporate income statement. Problem solved? Nope. This brought about compensation packages glutted with stock options, bonuses, and other esoteric mechanisms which sent overall income into the stratosphere In short, it was the social engineers who created this problem.

    But is it really even a problem? The only ones it directly affects are the stockholders.

    1. vidimi

      for real? if a company grows 10% per annum but the CEO’s pay grows by 20% (it’s often more), the CEO’s “needs” will take away from the company’s employees, freezing their wages and often requiring lay offs simply to keep wages stagnant. all of society loses.

      1. Jack King

        That’s a myth. If the majority of a CEOs compensation is in the form of stock options, how does that affect a worker’s pay?

        1. ambrit

          Dear Jack;
          It affects workers pay two ways. First, the heightened executive pay package sequesters funds from the general pool of available resources; some of which goes into raising worker pay. Second, the demands of exorbitant CEO pay packages force a stripping of productive assets from the corporation in the interests of boosting stock prices, and indirectly, the stock option portion of the CEO’s pay package. Both directly remove resources from the corporation general resources pool. The result is a race to the bottom, and a ‘death spiral” for the corporation.
          A CEO with $100 million in the bank is much better prepared to weather a layoff or corporate collapse than is a floor worker with $1000 in his or her bank account.

          1. Jack King

            “First, the heightened executive pay package sequesters funds from the general pool of available resources; some of which goes into raising worker pay.”

            Nope….a corporate expense is taken from the general pool. As mentioned in my original post, legislation forbids companies from expensing higher levels of pay. Ergo. companies have come up with other methods such as stock options which have zero affect on income statements (and thus salaries of workers).

            “Second, the demands of exorbitant CEO pay packages force a stripping of productive assets from the corporation in the interests of boosting stock prices”

            Stripping of productive assets? Let’s see…like they have to sell a company truck to pay the CEO?! That is bull shit and you are going to have to document from a reliable source that this is a widespread phenom.

            Look, of the 10 top income earners, the first 9 are from the medical field. Number 10 is the CEO, and they earn less than $200,000. These are the CEOs of small to medium sized firms who (pay attention) employ the vast majority of workers in the private sector. Large multi national corporations are the ones that experience this phenom, and it represents a fraction of the work force.

              1. Jack King

                A company’s stock has already fallen because of declining earnings. A layoff will bring them out of the red. That will obviously have a positive effect on stock prices, perhaps bringing them back to their previous levels.

                1. dk

                  Laying off high-pay C-level execs would then be more efficient, since fewer such layoffs would produce the desired balance sheet offset.

                  1. Jack King

                    Agreed….but payroll need to be cut. BTW, the balance sheet would be unaffected. The impact would be to income statements.

            1. vidimi

              share repurchases and cheap credit are the main reasons for stock price increases since 2009. this is plain looting. looting necessarily needs someone to steal from, in this case employees, whose salaries are frozen and jobs deleted in order to free capital for buybacks and make the company more attractive to investors; and dumb money investors, mostly 401ks and other pension instruments who are incentivised to pile money into the stock markets.

              1. Jack King

                There are many reasons for stock appreciation. QE has been the main driver, but certainly current earnings and the prospect of future earnings are the primary drivers, at least for the long-term investor (as opposed to traders who are in it for a quick profit).

                But this raises a disturbing question. What is the purpose of a business? If you were to start a company, why would you do it? Would it be to support yourself and your family? Or would your motive for risking your capital in a venture be that you wanted to provide good jobs with great benefits for strangers?

                1. bh2

                  There is, of course, a considerable difference between owner-CEOs of companies closely held and manager-CEOs who are no more than hired employees of public companies owned by “investors” whose primary (and often only) concern is quarterly performance.

                  These two kinds of CEOs (and their boards) are rewarded by qualitatively and quantitatively different incentives.

                  There is precious little evidence that hired “professional management” produces better long-term corporate performance regardless of the level of pay and perks showered on them.

                  1. Jack King

                    “There is precious little evidence that hired “professional management” produces better long-term corporate performance regardless of the level of pay and perks showered on them.”

                    Completely specious. There is a plethora of data that can be mined about a company which measures performance. No one is going to invest in a company that is performing poorly…. certainly not the fund managers who can move huge blocks of stocks.

                2. todde

                  Start a business?

                  Most CEOs of publicly traded businesses are put in control of billions of dollars.of.other peoples.assets.

                  And read up on fas123 for clarification on how options are.reported.on the income. Statement.

            2. Vatch

              Oh come on, Jack. Where does the money to pay executives come from? And when an executive exercises an option to buy company stock at a reduced price, who provides the missing money? The company accepts less money for its stock than it would get on the market — in other words, the company accepts a loss to provide a bonus for the executive.

              Whether or not a company has to sell trucks to finance the executive bonuses is irrelevant. What is relevant is that the company has less money to invest, less money to pay their employees, and less money to pay their bills.

              Hiding behind accounting tricks doesn’t change the fact that more money for the executives means less money for other purposes.

              1. Jack King

                “Oh come on, Jack. Where does the money to pay executives come from? And when an executive exercises an option to buy company stock at a reduced price, who provides the missing money?”

                Say I have an option to buy 1000 shares at $50/share. The market price is $75 so this is a good deal for the exec…especially if, in time it keeps going up. But the exec must still come up with $50,000 which goes into the company treasury. Where the exec makes his money is when he sells (usually at least a year). This is a zero sum transaction. Nobody is harmed…certainly not the worker.

                1. Vatch

                  The company loses $25,000, which it would have made if it had sold the stock on the market for $75,000. They lose the ability to spend the $25,000 on other things, such as salaries and investment.

                  If you sell something for less than it’s worth, you lose money. It’s not rocket science.

                  1. Vatch

                    As Profundis points out, to sell optioned stock to the executive, the company must buy the stock back from the market. In your example, the company buys the stocks back from an existing stockholder for $75,000, and sells them to the executive for $50,000, resulting in a $25,000 loss for the company.

                    1. Jack King

                      Nope…don’t believe that is how it works. The company sells stock to the exec?! In the 1990s during the dot.com boom, companies were faced with a shortage of software engineers. They would try anything, including generous option packages to hang on to them. I was one of those engineers. I was given very generous option to buy their stock. Notice I didn’t say they sold me anything…they gave me options to buy….if I wanted to excercise them in the future. There is still a gamble on my part. If I took my option and the market crashed (which it did) I could lose.

                    2. Bart Fargo

                      That’s not quite how it works. When employees exercise stock options, companies don’t buy the optioned shares directly from the market, but rather issue new shares which dilute existing shareholders’ wealth. As a result, management usually institute buybacks which are meant (in part) to counteract this dilution and keep the number of shares outstanding constant. This results in companies having to pay the difference between the option price and the market price, and shifts the burden of dilution from shareholders back onto the company and by extension its employees.

                      In addition to this, it shouldn’t be difficult to see how high levels of executive stock compensation – a trend which, like buybacks, started in the 80s, long before the $1m deductible limit of IRC 162(m) came to be in 1993 – create incentives to expand buyback programs and artificially boost stock prices. In fact these incentives appear to be the primary driver of buybacks, and massive buyback schemes (lately swallowing up more than 25% of net income) absolutely do impact companies’ ability to reinvest in their own development and employees. But Jack seems to be having trouble understanding this, so here’s a link that explains the situation in more detail than we are allowed in the comments:
                      https://hbr.org/2014/09/profits-without-prosperity

                    3. Vatch

                      We’re not discussing options for programmers in the dot.com boom. We’re discussing options for CEOs, and those CEOs do make a fortune from those options, and it costs their company money. You may not believe that’s how it works, but if it didn’t work like that, the CEOs wouldn’t become rich.

                    4. todde

                      You were given an option to buy stock. If you would of bought the stock it would have come from company treasury stock. You are the buyer the company is the seller.

                    5. todde

                      If you took the options and the stock price fell, it can only be a result of your poor job performance.

                      Or maybe stock prices have little to do with job performance, which seems to be the argument we are making.

                2. Jack King

                  Who provides the missing money? LOL. Before I go any further, let me ask, have you ever had any course work in Business Finance?

                  1. Vatch

                    LOL. I guess you’ve run out of facts and logic if you have to resort to comments like that.

                  2. Vatch

                    Oh, I see what you’re complaining about. The word “missing”. Yes, that’s a mistake on my part: I should have just said “who provides the money”. But it doesn’t invalidate anything else that I was saying. Bart Fargo has cleared things up for us, so I consider this issue to be closed.

                    1. Jack King

                      Well, the “Reply” button sadly disappears after a while making it impossible to respond to a specific post, but regardless of what mechanism management uses to reward specific employees, if it proves to be financially deleterious, people will flee from the stock. The consensus here is that if there is extra cash laying around, that apparently it should just be given to the workers. That may be how things work in the old “worker’s paradise” of the Soviet Empire, but not in a market economy. It is the stockholder who are rewarded. Workers are an expense. And that includes managers. Even China has gone to the rewards of a market system. Case closed.

                    2. Vatch

                      If extra cash is given to the executives, then yes, some of that extra cash should be given to the other employees as well. But the extra cash can also be invested, and that’s not happening much these days.

                      In other threads, I have been extremely critical of 20th century communism, and I am recommending nothing remotely like that. In fact, I see a strong resemblance between the oligarchy of the richest capitalists today and the oligarchy of senior Soviet communists. In both cases, the people at the top seized special wealth and privileges for themselves.

        2. vidimi

          as false as calling it a myth is, your argument still glosses over the fact that CEO pay often outpaces company growth.

          1. Jack King

            This may be the case. Now go back to my original post on this subject and you will see that this was not always the case, and why it may be happening now.

            1. Skippy

              Ummm…. 90s? Starting point was around the mid 70s which then was a multiple[s] of equity as money, which then made Gores hockey stick look flaccid.

              Skippy…. and some gab on about banks being able to “print” moeny out of thin air…

              1. Jack King

                How about documenting that…..from an objective credible source would be helpful. Perhaps a chart showing a quantum jump around 1970.

                1. Skippy

                  How about you go look at a well known chart showing the divergence between wages and productivity, which is correlated to the increasing spread between floor and executive remuneration from 1-20/40 to 1-400/1000+.

                  BTW nice job on cherry picking one law and hanging your biased reasoning on it like bobbles on a X-Tree.

                  Skippy… or are you publicly stating in the scope of your knowlage that your unfamiliar with this common data?

        3. profundis

          Stock buybacks are necessary when options are exercised, which happens after stock prices have already escalated, often due to window dressing but not added value. That cash is no longer available for compensation to employees.

          Also, there are limits on stock options which makes that a zero-sum game, so rank and file employees (who are arguably equally entitled to stock options if their base is commensurate with CEOs) lose out there.

          Finally, stock options inherently lead to stock price inflation, because CEOs are focused on increasing stock prices rather than increasing the long term value of the company itself.

          Did I forget to mention that the majority of securities fraud is perversely incentivized by options? Yes, I did.

    2. zapster

      Eh? It also affects the pay of the thousands of workers that pay his salary.

      They must take less if he is to take more. Simple arithmetic.

    3. ambrit

      Another negative consequence of this dynamic is the spread of a “cult of personality” management culture. I have seen this myself in my unfortunate foray into bog box retail. The store manager had a perceptible ‘ego’ problem in his relationships with underlings. He had a clique of sycophants, and a perpetual ‘glad hand’ persona for the floor workers. Through it all, the primary goal, which was reinforced at every opportunity, was the stores “bottom line.”
      I can remember my amusement, after the initial shock wore off, at being told my extended warranty sales percentages were needing of “a major push on [my] part. All you Plumbing Department sales staff are lagging way behind Appliances’ people.” Strange to say, very few of the Plumbing Departments products offered extended warranties. Almost all of the Appliance Departments products offered them. Hmm.. Something was obviously wrong with the Assistant Managers logic. But, hey, we’re all one Happy Family under Dear Leaders Godlike Stewardship!
      Oh, my point? This chain store started introducing ‘part time’ floor workers in volume about when the CEO’s pay shot into the stratosphere. I dare anyone to walk into one of the DIY Big Boxx Stores now and find a generally contented looking, much less helpful floor staff. Look behind that “Thank you for your money” smile. How do the persons’ eyes look? Happy? Sad? Resigned? The next time you are in the checkout line and the cashier asks you, “How are you today?” give them a real answer and see if they listen or not.
      Social engineers? The Government has nothing in the way of social engineering compared to business. What, after all, is advertising?

    4. armchair

      Cool, so we get rid of this little-known, bonehead law, and CEO pay comes back to earth. Isn’t that neat?

    5. reason

      Not all effects are direct. In fact not all IMPORTANT effects are direct. Next time you get hit by a Tsunami perhaps you’ll remember that.

  3. Denis Drew

    I figure that CEOs are like pro ball players. You have a few real stars and all the “B” players you are ever going to need. The stars are going to be stars anyway because that’s what they are made of and this is their one time around to show it off. The “B” players are better than the rest of us but as far as the economics is concerned there are plenty to go around: so no need to pay “B: players through the nose to retain them. They (and the “A” players) will work just as hard for $2 million a year as they will for $20 million.

    1. allan

      “The “B” players are better than the rest of us”

      Not true. Take just one example from the film industry:

      Paramount Pictures: Parent company Viacom breaks out its numbers for Paramount’s moviemaking operations, shorn of any confusing TV production, offering a gift to students of the quirks of the film business. They aren’t pretty. Since 2008, per public filings, revenues have fallen every year but one, decreasing from $6.0 to $3.7 billion, and during the same period, almost inexplicably, home-video revenues have plummeted from $2.7 billion to just under $900 million. The overall DVD market decline of some 30 to 40 percent since 2008 accounts for only about half of this drop. For “managing” this calamity, Brad Grey is—per a number of sources of widely varying reliability—paid a reputed $15-20 million a year in total comp.

      I think many NC readers could “manage” this calamity just as well.

    2. James Levy

      I can tell, given the parameters of a game, who is good at it an who is not, and compare performance from team to team and person to person. How can I tell is the CEO of Kodak is better than the CEO of Microsoft? What objective criteria like home runs, RBIs, batting average, and slugging percentage can you invoke to show me which person is doing a better job? A person working to run a struggling manufacturing firm in Maine might be doing a hell of a lot better job than the CEO of Wells Fargo or Bank of America or Intel but you’d never know it because of the built-in clout and brand power and revenue streams of those huge concerns. Hell, the CEO of amazon is a billionaire whose firm doesn’t even consistently show a profit!

      In short, there is no objective way to tell who is good and who is bad unless you rotated these people from job to job and industry to industry to test them out and see who’s really better at running a company. And that still doesn’t imply that all the profits should be swallowed up by the top managers. It could as easily go to every employee in the form of profit sharing. In fact, given the usual logic promoted by neoclassical Economists, wouldn’t incentivizing every employee be better than just incentivizing a few at the top?

    3. lyman alpha blob

      That’s right. You can have mediocre at best talent and still get paid the A level salary even though it isn’t in the least bit deserved. And in baseball at least, like for CEOs, those contracts are guaranteed no matter how poorly one performs.

      The Red Sox just forked over $83 million for 4 years for Rick Porcello, a pitcher with a very mediocre career ERA of over 4.00 and they aren’t getting a dime of it back.

      So yeah, in a way I guess you’re correct.

  4. Alejandro

    There seems to be a deeply embedded fear of challenging the psycho-‘logics’ of dependency. CEO’s believe and are treated as “being” indispensable…but doesn’t TBTF infer that anybody can do their “job”? At the other end of the totem pole, people believe and are treated as “being” disposable” and believe that their existence “depends” on the “charity” of the Corp… seemingly unaware of their contributions and how they are depended upon. Not suggesting a dichotomy but maybe the contrast can help focus on the psycho-logics, up and down the scale…and how ‘we’ accept and use language that works against our own interests as a society…

  5. Jeff Z

    Jack,

    The new executive pay packages (stock options) were based on the idea that if a company outperforms its peers, the people in the company should be rewarded. But it implicitly makes the assumption that the only reason performance goes up is because of the decisions made by the CEO. True, they have an effect, but that is never the only reason. (How is performance measured btw? If stock price, then CEO pay is circular and self referential, as Yves points out at the end of the post.) More important is that defenders of these packages assume that the boards and the CEOs are honest – that they won’t commit outright fraud or otherwise find a way to manipulate the stock price in the short term to make their compensation skyrocket – stock buybacks come to mind.

    It always stuns me that these packages were and are structured in such a way that it reveals that many economists and financiers don’t take them as an outright refutation, or misapplication of most of neoclassical economics. For example, economists have developed so called insider-outsider models to bash unions, but these seem equally applicable to CEO pay. It also shows that many econ/finance types in this area continue to act as if they are unaware (or deliberately ignore) the idea that a dollar today is worth more than a dollar a year from now – IBGYBG and all that.

    Then again, if their function is to provide a “scientific” rationale for theft, well, a lot of money can buy a lot of ‘ignorance.’

  6. John Bohn

    It’s an interesting insight that boards of directors generally want their workers’ pay to be below average, forcing workers’ pay down, and want their CEO’s pay to be above average, forcing CEOs’ pay up.

    But I could imagine CEOs saying that’s not rent seeking, but how markets are supposed to work. They could claim that boards’ preferences are reasonable: under stress, give more blood to the brain. More cynically, one might say that boards have little idea what makes a good CEO, and price signals are all they understand. Either way, though, while this strategy taken too far may cause the death of the organism, they’d say we haven’t reached the point where the corporate brains are getting too big a share, since stock market valuations are still increasing. Now, if we redefine the organism as US society as a whole, we might be at that point — at the macro level, those companies collectively depend on the little workers to buy their products. If they keep starving them for blood, they’ll all die! But thinking that way is socialism!

  7. paulmeli

    “But is it really even a problem? The only ones it directly affects are the stockholders.”

    It encourages (incentivises) the practice of accounting fraud, which for some classes of companies (financial especially) hurts average citizens plenty. Then, adding insult to injury, the criminal enterprise that has replaced the institutions we used to rely on steps in and monetizes the bad behavior.

    Not to mention that in order to increase profits, the measure upon which CEO pay is determined, the only avenue available is to reduce wages, directly through pay and benefit cuts, indirectly through ‘efficiency’ measures, all of which serve to reduce income for some group, which usually means workers.

  8. flora

    “…outsized pay for those at the top is a reflection of a state of nature.

    That argument is nothing more than Social Darwinism dressed up for a new century.

  9. Min

    I think that the focus on CEO pay is too specific. IMO, compensation that includes rents is largely a mark of being a member of The Club, people who consider each other better than the hoi polloi, and who reward each other at the expense of those who are not in The Club. More and more minorities have been admitted to The Club in recent years, and that is progress of a sort. But the rent is still too damn high!

  10. Lambert Strether

    Of course CEO pay depends on talent: The talent for getting CEO pay.* Then see under Accounting Control Fraud, stock buybacks, fraud, looting, and all the rest of it.

    So wretchedly excessive rising CEO compensation not only does God’s work, it’s socially necessary: A rising tide lifts all yachts.

    * This is parallel to how meritocracy works: Passing tests proves the ability to pass tests, which is in fact the point of the exercise. Reflexivity wherever you look…

  11. profundis

    Not only is target pay set above the so-called peer group median, but the compensation “experts” are also expert at picking peer groups that aren’t necessarily peers, but often tangentially related companies which happen to already have executive compensation set well above the company’s actual peers.

  12. pdxjoan

    It’s hard to understate the importance of a shift to Shareholder Value Maximization as the sole reason why a corporation exists. Corporate mission statements took out references to caring about their customers, their employees and the communities in which they did business, and replaced them with the singular focus on increasing share price. I believe that this concept was authored by Milton Friedman in 1970.

    It justifies anything the executives do in pursuit of a higher share price today. As recent history has shown us, for many of these executives, their pay hinges on reducing investment in research and development and eliminating as many jobs as possible, while lobbying for government hand-outs, bail-outs and subsidies and forcing dissatisfied customers into arbitration and out of the courtroom.

    Shareholder Value Maximization was designed to align the interests of the executives with the interests of the owners/shareholders. And, indeed, it has. But, at what cost to society? We are still finding out.

  13. todde

    Oddly enough, my experience has been that CEOs try to manage earnings, as opposed to maximizing earnings.

    If a company is having a good year and will beat market expectations, accountants are called in to review the balance sheet to writeup/down accruals and defferals.

  14. todde

    Regarding stock options, it.took the accounting industry a.couple decades to figure out how to account for them.

    Not once did I hear anyone mention the fact that is stock options was.so difficult for us to put a value.on maybe we.shouldnt even be doing it.

  15. Rosario

    We are not talking about the John Henry’s of rail driving here. Linkages to a persons productive capacity break down the farther it goes from the purely technical or mechanical (i.e. you can’t cheat a natural process). How do we quantify a CEO’s success, stock price, profits, production, benefit to society? What? There are companies whose shares are stratospheric that have no productive profit on their ledgers. Their product is largely perception. In effect being a good CEO can mean being a good actor or bullshitter. Should people be valued for that skill. Getting any semblance of an objective measure of compensation for labor performed is dubious in the realms of executives. Also, what of privilege and the compounded benefits of class? Notice how many CEOs are white men.

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