CEO Pay

If you think the CEO of a company is being paid too much money, here is one way to fix it.

Of course it turns out it isn’t quite that easy, this story by Planey Money doesn’t have the happiest of endings. The CEO ends up making more money, the shareholder involved has to sell all of his stock and agrees to not buy any more for several years.

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The ratio of CEO pay to the average worker has been going up for years, the AFL-CIO has a great website devoted to the issue. This is often viewed as a sign we are heading back to the gilded age of industrial barons like Andrew Carnegie. Though some might approve, that era was also one of child labor, extreme poverty of the lower classes and actual armed conflict between fledgling unions and their employers.

What has always seemed so strange to me however, is why no one does anything about it. In some respects the stock market seems like it should be the ultimate participatory democracy. As they point out in the Planet Money story, every cent the CEO gets paid is a cent less in profit for the shareholders. You would think that market forces would drive CEO pay to be exactly what they should be and executives would get paid an equivalent salary to how they are driving corporate profits.

The problem is that this isn’t happening. In fact, the reverse often seems to be true. Recent research has shown how the higher a CEO is paid, the worse the companies stock tends to perform over the next three years. The research firm Equilar completed a similar study showing how pay had no link to company performance, whether it was measured by stock value, profitability or revenue.invest11

Part of the problem could be that fewer and fewer people are participating in the stock market. 90 percent of stocks are owned by only ten percent of the country, and much of that is in mutual funds as opposed to individual stock ownership. As becomes clear in the Planet Money piece, the CEO, the board of directors, the large shareholders, often they all know each other. They play golf at the same clubs, the eat at the same places, it isn’t as though they are trying to fix the system and steal money but they often have an over inflated view of each others relative worth. There is probably also the bias of the fact that the board hires the CEO, cutting his or her pay because of poor performance is proof that you made the wrong choice.

This is a big issue with lots of different angles, there are no answers in this podcast but I will keep looking for them. If you want the whole episode you can download it from Planet Money or find it on iTunes.

 

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