Ted Rall for November 24, 2014
Transcript:
No one expected this: the more corporations are forced to reveal what they pay their CEOs, the more they pay them. (P. Raghavendra Rau: How do you tell your shareholders you have a great CEO? "For proof, we pay him peanuts?" They never say they do that.) But corporations have the exact opposite approach to salaries paid to their other workers. (Andrew RosS Sorkin: Most employers seek to hire people at the lowest possible cost while still paying them enough to... keep them from leaving.) So the ideal salary structure for an American company is one excellent executive... (Man: The best chief executive makes the most money!) ...who presides over a workforce full of idiots. (Man 2: We could fire the idiots and replace them with twice as many morons.) (Man 3: Smart thinking!!)
Sadly, this is too true to be funny. There has been a ridiculous vicious cycle of CEO pay increases in the US over the past couple of decades. (Yes, specifically the US. Not true elsewhere in the world.) Once it goes up, of course it can’t go down, can it? And boards of directors, who already own responsibility for placing the CEO above all else, and are now personally responsible thanks to Sarbanes-Oxley, are willing to pay whatever they have to in order to get someone they think reduces the risk to the company.Since it is certainly true that a given CEO can be the difference between a company succeeding and failing, this perception of the CEO is crucial is understandable. However, they are often using pay as a proxy for capability (as noted above), when some CEOs have just managed to move on fast enough to leave their mistakes behind. Or even not – my favorite example of a disastrous CEO is Bob Nardelli, who went from one of the possible successors to Jack Welch at GE to nearly destroying Home Depot (they wound up paying him $200 million to GET RID of him, which summarizes the problem with executive compensation these days) and then not improving Chrysler.American business is not so successful that it can justify the differences in pay over other companies. The ratio of CEO pay to median salary for all other employees (CEO versus average employee, in other words) is 22 to 1 in the UK, 12 to 1 in Germany, and 400 to 1 for the US. No way US CEOs are 20 times better than their UK counterparts – and I speak as an authority on this point, since executive assessment is my area of expertise. (http://work.chron.com/ceo-compensation-vs-world-15509.html)And indeed CEO pay has increased way faster than workers, to Ted’s other point – American worker pay has declined in real terms despite increase in productivity. That means people are working harder for less money. Productivity is something that CEOs get paid to achieve, but they are doing it on the backs of their employees, which is not necessarily a good strategy. (Costco versus Sam’s Club, for example: Costco is doing a lot better, and they do a better job for their employees.)Interestingly, people do not know these numbers. A recent study by Kiatpongsan & Norton (Perspectives on Psychological Science, 9:6) found that when you ask people around the world about the ratio in pay between CEOs to unskilled workers, they estimated 30:1 and preferred 7:1, whereas the actual ratio is 354:1. In other words, most people surveyed (n = 55,238, not a small sample, and 1,581 in the US alone) thought CEOs were massively overpaid — but had no idea that the actual ratio was an order of magnitude greater still.So clearly the CEOs are not convincing the workers of their worth, which to me is an interesting indicator of their actual success.The real question is how to normalize this, as CEOs are often in a heads-I-win/tails-you-lose situation: when revenues go down, they pay for a CEO who can fix it; when revenues go up, they pay for a CEO who has made it happen.And research does show that someone too separated from their workers is not as effective in understanding the needs of those people.