CEO Pay

OK, we have looked at managers and bureaucrats, some of which are highly paid and some of which are middle class. What about those overpaid top executives? What about those earning millions per year?

The first question to ask is: are such executives overpaid, and if not, why not?

Running a large corporation well is hard! There are hundreds of people to deal with. There are egos to soothe. There is a tremendous amount of information to integrate. And of the huge volume of information, much of it is purposely false or incomplete. Some people farther down the chain of command are covering their asses. Others are “yes men” providing their superiors what they think their superiors want to hear. It is a wonder that big corporations are competitive. (Consider the biggest corporation of all: the old Soviet Union. It’s efficiency was stunningly bad despite heroic efforts.)

So there are few people up to the task of CEO of a huge corporation. The difference between a good CEO and a less good one is huge in dollar terms. Consider a major corporation with $50 billion/year in sales. A 5% improvement in efficiency of operations translates into $2.5 billion/year in savings! A mere 10% commission on these savings is $250 million/year!

That 5% improvement should be measured against the next best available CEO, and here we run into a problem: it is hard to measure skill at the top job. Performance at lower jobs does not entirely match skill at the top job. Conditions change, so comparing different CEOs at different times is of limited validity. So it is fair to say that some CEOs are grossly overpaid. Even the far Right press admits this (read Forbes, for instance). But if taking home on the order of 10% of the value of what one adds to a corporation is reasonable, some of the outrageously high CEO salaries may well be reasonable.

I suspect some alarm bells are going off at this point. It sounded like I just said that some of the top paid executives are getting paid fairly. Well, it would be true if such giant corporations were natural. In a great many cases, they are not. Our tax code and regulatory system encourage corporations to be larger than would be otherwise natural. And this results in huge executive salaries.

To reduce top executive salaries, reduce the size of corporations.

Homework Assignment

So, you think that top executive salaries are excessive even with the current system of huge corporations? Why not put your hypothesis to the test.

  1. Consider starting a mutual fund whose purpose is to buy shares in corporations where the top executives are overpaid. Have the fund buy up a controlling interest in such corporations, fire the top executives, and hire new ones at a lower rate. If the old ones were indeed overpaid, the savings should result in higher profits and better worker morale. The fund could then sell the stock at a profit and move on to the next corporation.
  2. What are the legal barriers to doing this? There was a large reaction against the hostile takeovers that were done in the 1980s. Did the resulting laws lead to greater protection of CEO jobs and high salaries?
  3. Consider the rank and file unionized workers in an established industry such as automobiles. If all these workers were to put 10% of their salaries into buying the company they work for, how long would it take for them to hold a controlling interest? [I recall reading somewhere that it wouldn’t be that long, but I cannot remember where I read this.]

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