Executive Compensation: Are CEO's Overpaid?

There has been strong reaction to an article published last week by USA Today regarding executive pay. The article titled "Stocks May Fall, but Execs' Pay Doesn't" by Greg Farrell and Barbara Hansen presented a balanced view of current CEO pay and trends for the future. However, it seems that the only thing some people, including Barack Obama, got from the article is that CEOs are paid a lot and that's not fair. Reacting to the article last week while campaigning in Indiana, Obama said "times haven't been too tough for everyone in our economy - because the top Wall Street CEOs have been doing just fine. In this morning's USA Today, there was a story about how much the top CEOs have been making. They did a study and found that the top 50 CEOs made somewhere around $15.7 million last year - despite the fact that many of their companies were having a bad year. Think about that. It doesn't matter whether they're doing a good job or not - Wall Street executives are being rewarded either way. That's not the America we believe in. That's an outrage." Obama has sponsored legislation in the senate that would require public companies to have a non binding shareholder vote on executive pay packages. He joins several other groups that have been in the news lately calling for reforms in the way that CEO's are paid. Even Arizona Senator John McCain seems to be in agreement as he spoke at Carnegie Mellon this week attacking what he called extravagant CEO pay and severance packages. What Obama, McCain, and so many others seem to be missing is that this is the American way and that the market already gives us the power to vote on executive pay.

The Inequality Reality

Economic inequality is a reality most of us accept on a daily basis. Sure we would all like more money but most of us recognize that we will never get paid millions of dollars to dunk a basketball or hit a homerun. Our culture freely accepts and supports the notion that certain people are worth more than others in an economic sense. Whether it's good looks, acting ability, or athletic prowess, certain people are paid more because they possess skills that the rest of the population does not. In America we celebrate our sports figures and entertainment icons more than any other country in the world. That's why I argue that whether we like it or not, exorbitant CEO pay is the American way. We Americans seem to have no problem with Alex Rodriguez signing a $250 million contract because it is clear that he possesses skills and talent that the rest of us do not. Top corporate executives are operating at the highest levels of business in the same way that professional athletes compete in the highest levels of their respective sports. So why is there a difference in the eyes of the American public between the compensation levels of top CEO's and our top athletes?

Sign of the Times

Politicians and the general public seem to need to place blame on somebody whenever the economy takes a downturn. During periods of strong growth and/or during non-election years, nobody seems to mind too much that CEO's are getting paid $15 million+ salaries. Furthermore, I suspect that the average American was not sending a thank you card to the CEO of KB Homes when the stock increased 363% from January, 2000 to January, 2007. But when the stock fell this year it suddenly became all his fault and the $7 million compensation package he received in 2007 was an outrage. It is inevitable that during slow economic periods some companies aren't going to do well but does that mean that the CEO's of these companies shouldn't get a paycheck? And as for the size of the paycheck, not everyone is qualified to run a billion dollar multinational corporation. The reality is that being a CEO is incredibly hard and not many people are qualified. This translates into very high salaries for the people that do posses the skills and knowledge necessary to run large companies. That's not to say that the market won't make mistakes from time to time and overpay a CEO who turns out to be incompetent, but these mistakes are a part of business. We live in a free market society that sets the prices for all of our goods and services, including wages. By participating in the free market we help set the price levels for everything and we also have the power to affect change.

Vote with your dollars

What so many people calling for legislation regarding executive pay seem to forget is that we already have the ability to express our approval (or lack thereof) with our dollars. If we don't like the way a company is run, we can simply choose to sell the stock, or not to own it in the first place. Taken one step further, we can choose not to do business with a company at all. By choosing not to invest or spend our money with a company we are sending a far more powerful message than a non binding shareholder vote. If you don't approve of something, don't be a part of the company; that is the American Way.

A Final Note

I am by no means an elitist and I am no more likely to earn a multimillion dollar salary than I am to win the lottery. What I am is a believer in the free markets. Sure it's easy to get frustrated when we look at the discrepancy between top executive salaries and our own bank accounts; but that doesn't mean we should step in with more regulations. One final issue I would like to point out to Barack Obama, John McCain, and other politicians engaging in election year politics, is that members of congress make an annual salary that is three and a half times the median household income in the US. What might be more beneficial to most Americans is legislation requiring a public vote on the salaries of our elected officials. Perhaps if we to hold them publicly accountable for their paycheck they might be motivated to get more done for the American People.

Sources:

Greg Farrell and Barbara Hansen. "Stocks May Fall, but Execs' Pay Doesn't."USA Today.

"Obama Discusses Plan to Help Families, Stimulate the Economy." BarrackObama.com.

Johanna Neuman. "McCain outlines his tax initiatives." Los Angeles Times.