CEO Pay: Out of Control

I was reading an article the other day about executive pay in America. This article said that in 1980 the ratio of what the CEO made to what the average worker made was 44:1. By 2007, that ratio had risen to 344:1. In other words, CEO pay went up 7.8 times as much as average worker pay.

That got me to thinking: has the average American company gotten 7.8 times as complex since 1980? That seems unlikely. So I searched for data that would answer my question, and I couldn’t find any. Therefore my assumption that companies have not gotten 8 times more complicated will have to stand.

But even if that assumption is wrong – even if companies HAVE gotten 7.8 times more complicated – that doesn’t mean that the ratio of CEO pay should have gone up that much. The ratio compares CEO pay to average worker salary. And if companies are getting more complex, then lots of worker salaries should be going up. Maybe not folks on the factory floor, but the guys who run the factory. Basically, everyone at director level and above should have their salaries going up to reflect any increasing complexity. Thus CEO pay is going up even faster than any increase in corporate complexity.

So what is the explanation? You’ll have to read the article, which discusses the invidious system of compensation consultants and interlocking boards. But the bottom line comes down to greed. CEOs get as much as they can, without concern for the impact of their compensation on the company or the workers below them in the hierarchy.

As many pundits pointed out after the financial meltdown [see examples here, here and here], American companies used to have a public service obligation; they were expected to provide some value to society, not be purely profit-making vehicles. The authors of the article (who are both, I should note, professors at Harvard Business School, the American epicenter of corporate greed) call for a return to that earlier attitude, with societal obligations providing a normative check on unrestrained greed. Their money quote (sweet irony!) is here:

“Every corporation is embedded in a social matrix, and is accountable for multiple factors within that social setting: obligations to the society that provides it tax advantages or public goods, such as public schooling, publicly financed research, or basic infrastructure such as roads and airports. In a democratic society like the United States, the general public expects responsible and ethical practices and the exercise of self-restraint among business leaders in exchange for vesting an extraordinary amount of power that affects society’s well-being in private, corporate hands.”

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