The Institute for Policy Studies released a report Wednesday August 31st which shows that many large companies pay more to CEOs in compensation than they did in corporate income taxes to the federal government in 2010.
Of the 100 top paid CEOs, 25 of them earned more than their companies’ tax bill, including the CEOs of Bank of New York Mellon, Verizon, eBay, GE and Boeing. And astonishingly, the report found that the gap between CEO and average U.S. worker pay rose from a ratio of 263-to-1 in 2009 to 325-to-1 last year. At the same time, recent studies suggest that CEOs seem to be under more stress and enjoying their work less than ever before.
The release of the report has helped underline the problems in the system of compensation for CEOs. To understand this issue more fully, we will first look at how CEOs have been traditionally viewed and compensated. Up until the last decade or so, public perception has been that they were stalwarts of our society, hard-working types from humble beginnings who rose to the top through honest determination. CEOs were viewed as having three functions: to run companies that make America better (Steve Jobs with Apple, Bill Gates with Microsoft and Henry Ford with Ford Motors), to provide shareholder value (Jack Welch with GE, Albert Sloan with GM) and to grow companies that employ Americans (Cornelius Vanderbilt with steamships and railroads, Tom Watson with IBM and Sam Walton with Wal-Mart). In return, CEOs received respect, high remuneration and some became household names. While the CEOs prospered, so did their companies, the shareholders and the United States as a whole. Many Americans seemed to share in the wealth they created.
Through the early 1980s CEO compensation plans were typically spread out over 5-20 years, which encouraged CEOs to make long-term decisions and plan for sustainable growth. When the tax rates were substantially lowered in the Tax Reform Act of 1986, it was less necessary from a tax point of view to defer compensation over a long period of time. CEOs wanted as much compensation as possible as soon as possible, and companies agreed to pay it. The CEOs’ long term view was no longer necessary; greed and short term gains were allowed to flourish at the expense of long term growth on both a corporate and larger economic level.
For the past decade CEO pay has risen yet shareholder value has not. The S&P 500, as any chart can show you, is basically where it was in the fall of 1998. Corporate America employs fewer Americans today than ten years ago. In July 2011, there were 109,156 million private sector payroll jobs, down from 110,737 million in July 2001. For many Americans, the US is not better off today than ten years ago. CEOs are also not thought of as highly as they were ten years ago.
To me, the issue is similar to one facing public service unions. The union employees often receive raises no matter how well or poorly they perform their job. Until recently, teachers were almost exclusively compensated based on seniority rather than how well they teach or how well the students learn. In recent years that has begun to change and we can say the same thing for police officers, firemen and even sanitation workers. What came to my mind was a New York Times article during the 1970s stating that the sanitation workers in New York City received little respect from the public, felt tremendous stress from their jobs (injury rate was greater than either the firemen or police officers at the time) and the average sanitation worker did not enjoy his job but was working solely for pay and benefits. The average sanitation worker actually received more than the average fireman or police officer working for New York City, but sanitation workers did not care about the cost of their benefits’ effect on New York City. They cared only about getting the most for themselves even if it bankrupted their employer. I do not know what has happened since then but it does seem that CEOs are in a similar situation to the sanitation workers of the 1970s. When all else fails go for the money.
The best way for us to tackle this problem and promote a better situation for employment, shareholders and America in general is to review the role of CEO. We should expect CEOs ‘compensation to be tied to corporate performance. The best way to ensure that is to make a much greater portion of CEO pay tied to the long term health of their companies by deferred compensation that is paid out over ten to twenty years with a great deal of it contingent upon share price. If we do that, the CEOs will start thinking more strategically because their self-interest will be aligned with the long term health of the companies they are charged with managing. Until we accomplish this change inCEO compensation, we cannot expect CEOs to act differently than the New York City sanitation workers of the 1970s.
