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Many potential causes of overpayment have been identified: CEOs with too much power, inattentive boards of directors, conflicts of interest by compensation consultants, the use of stock options--the list goes on.
Some studies show the average CEO was paid $10 million to $15 million in 2005. This includes their salary, bonus, stock option gains, stock grants, and various executive benefits and perquisites. Are rank-and-file workers underpaid? Everyone, I suppose, feels a little underpaid. Some data sources indicate the average American worker was paid about $40,000 in 2005. Anyone working in the technology sector knows this average pay level would barely hire a below-average administrative assistant in any of the technology hot spots in the U.S. And the average CEO pay has been earned by more than a few average technology company workers who had stock options in the right company at the right time.So, are CEOs overpaid compared to rank-and-file workers? If you read the media stories this year, and in previous years, you might conclude that they are. Some interest groups have determined that the ratio of CEO pay to average worker pay is an appropriate measure of this problem. Some Web sites allow you to calculate how underpaid you are compared with your CEO. According to these sources, chief executive pay is between 250 and 500 times that of the average worker.
Who are these CEOs who are purportedly paid hundreds of times more than the average worker? In most analyses, they are CEOs managing the largest public companies in America--usually the top 200 to 500. These are largest of the thousands of public corporations in the country. Given that executives typically earn more pay for managing larger organizations, we might expect these individuals to be at the top of the pay hierarchy.
It's more difficult to determine the relative value of the individuals in a job. Most CEOs I've dealt with are highly intelligent, have advanced degrees--often from one of the top universities in this country or elsewhere in the world--and have worked 70 or more hours per week for most of their career. Even if they weren't CEO of a public company, people with a background like that get paid much more than the average person.
Measuring worker pay
If we want to understand the pay level of the average worker in America, we would have to ensure we included all forms of their pay--wage or salary, shift differential, overtime pay, bonuses, tips, commission, stock-based compensation, hiring bonuses, retention bonuses, and so forth. Without digressing into which data sources do and do not capture all of this (hint: none do), this would provide a good portrayal of how much the average worker is paid for his work. We would assume that this data reflects average performers with average levels of education, and so forth. But that's not the data that's being used in these comparisons.
I can't recall seeing a comparison of how much software engineers are paid compared with postal workers, or database administrators compared with bank tellers. This might mean that no one believes these would be relevant comparisons, because different jobs with different educational requirements and different levels of responsibility should be paid differently. We don't always know or agree how differently, but differently.
It still would be completely meaningless, however--just like comparing CEO pay to average worker pay.
I am in no way trying to serve as an apologist for high executive pay levels. After more than 20 years in the field of executive compensation, I have seen numerous examples of inappropriate pay for executives--not only in amount, but in reason and in form. Billions of dollars have been paid to thousands of executives who have destroyed companies and ruined workers' lives. I have seen executives join a company shortly before a takeover and get millions in "change in control" payments.
I also have seen numerous examples of inappropriate pay for nonexecutives--the so-called average worker. I have seen software sales representatives who made far too much commission due to a flawed incentive plan; a receptionist earning more than double the market rate because she had been with the company for decades, and there was no pay cap for any position; software engineers who joined a company at just the right time, and cashed out their stock options just before the stock price crashed and the company went out of business, due to a poorly developed software product.
Fixing the right problem
If there is an excessive CEO pay problem, we won't fix the problem by measuring the wrong things and then misinterpreting flawed calculations. That only will encourage misguided legislation, and we've had plenty of that. It also might encourage big shareholders and their advisors to begin bullying companies into change using arbitrary standards, and we've had plenty of that, too.
Disclosure and publicity of pay allows us to identify the egregious situations and apply pressure to fix them, but only when the data seem accurate to reasonable people.
I just read that U2 made $260 million in gross receipts on their 2005 tour. That's $3 million per show (about $1 million per hour)--far above Motley Crue's $33 million for a similar number of shows (a paltry $400,000 per show, well under $200,000 per hour). I don't think most Americans want to impose an arbitrary cap on CEO pay any more than we want to impose a cap on U2's concert tour receipts because we know U2 would stop touring, and good CEOs would stop CEO-ing, and neither of those is to our benefit.
Let's focus on the real problem and not on concocted metrics rooted in sociopolitical sentiments. There is a lot of fixing needed in executive pay practices, and these average worker pay ratios have the potential to send us in the wrong direction.
Biography
Fred Whittlesey is chief compensation officer at PayScale, which provides access to compensation data.
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If he's in it for the money, what else is he going to do that'll make him more money? And if he's not, then it won't matter anyway.
Give me a break. These guys are obscenely overpaid.
"...And the average CEO pay has been earned by more than a few average technology company workers who had stock options in the right company at the right time..." How is this relevant? These one time windfalls have no relationship to the continually overpaid CEOs. It's like saying "I know of quite a few people winning 200 million in the lottery and CEOs don't make any more than that." What hogwash!
"...Most CEOs I've dealt with are highly intelligent....come from top schools...work 70+ hours per week...even if not CEOs they'd get paid much more than the average person." Many of the people I've met come from top schools and work 70+ hours per week (and these 70+ hours don't include visits to golf courses, board meetings in tropical locales, etc.), and they do indeed earn more than the average person. But their extra earnings is measured in percentage points rather than orders of magnitude!
"...Comparing CEO pay to average worker is as meaningless as comparing an engineer's salary to a postal worker's." This argument is ridiculous for many reasons: first, a CEOs pay is often compared to the average worker at their own company! The author, comparing engineers to postal workers, is comparing entirely different professions AND at different companies. Not same thing. And even then, the difference is, what 20%...50%? A far cry from 100-200 TIMES more! Furthermore, no one doubts that someone with additional responsibilities/educational backgrounds should be paid more than those without those responsibilities and qualifications - what is being questioned is whether CEOs responsibilities and qualifications are so vastly greater that they warrant the vastly greater compensation (and, again, we're talking about orders of magnitude differences!) No one in their right mind (except those involved in negotiating CEO pay or the CEOs themselves) could believe such a thing.
"...secretary earning double market because she has been there....no pay cap in these professions." More pointless rethoric. First off, how many instances of secretaries getting paid double market rates can the author quote? Is she making double what all the other secretaries are making AT THE SAME COMPANY? The author claims CEO pay relative to average worker is comparing apples to oranges...and then proceeds to make apples to oranges comparisons.....but even if he found that this secretary made double what the others in her firm made. Big deal! Relatively speaking, CEOS make obscenely more money than this secretary.
The argument could be made that CEOs get paid what the market will bear. But that is not so in reality: individual share holders of a company cannot vote on CEO compensation issues - that is usually approved by the board of directors....and guess who is usually on these boards? The CEO's buddies from the golf course who are, frequently executives themselves - and this CEO may be sitting on their board approving their future pay packages! One hand washes the other. It's a very corrupt system.
CEOs have great responsibility. They frequently, but not always, have stellar educational backgrounds. Sometimes their leadership is obviously responsible for the company's success (e.g. Steve Jobs at Apple.) More often than not, however, they're just as replacable as the average worker within a company (to wit, there are numerous examples of changes at fortune 500 companies without much difference in the fortunes of that company.) Now, with the exception of those very few CEOs that single-handedly created a company or brought it back from the brink of disaster, how could any CEO claim to be worth 100s of times more than the average worker at HIS company? It's a ridiculous thought...only people with a vested interest could think otherwise.
overprivledged rich-white-guy disinformation that constitutes
Fred Whittlesey's op-ed on CEO pay, the one the item that most
amuses and annoys is his anecdotal comparison of a CEOs
personal compensation package to a touring rock band's "gross
receipts" (which pay an army of roadies, security, support staff,
etc.). Bono ain't pocketing no $1 million bucks a show, folks.
And even if he was, he'd just use most of it to pay off African
debt (at least that's what he'd say he'd should do with it).
CEOs are grossly overpaid in the U.S. Do a smidge of research
and that becomes patently obvious. Smart, Ivy League guy
heads up a multi-billion-dollar company and makes a few
million a year? OK. Sounds fair. What? You say he's making
tens of millions a year, all while the stock price has declined, the
pension fund has been frozen, and 20% of workers have been
laid off? Indefensible. Plain and simple.
How much you get paid to sling this hash, Mr. Whittlesey? And,
if we stop paying you, will you stop?
- mattmchugh.com
Don't blame the people who accept the contracts, blame the people who offer it to them and don't write it clauses based on performance and any other variable their hearts desire.
IMO, the problem is not just because people who get MBA's are greedy, lazy and unintelligent(after all if they were not lazy and dumb they would have worked for a real degree and not just one that requires a heartbeat), it is the shortsighted policies of concern over shareholders.
Serve your customers properly and everything else will fall into place.
And the Overpaid CEO's are usually employees of large, publicly traded, corporations. They are overpaid because they establish the terms of their own compensation package (manipulate the market). Then they profit even more by offshoring the jobs of workers and supply contracts that had been fulfilled by domestic vendors,
You also declare we need to focus on the real problem, apply pressure to fix it, but then fail to state the problem or where the pressure should be applied.
I think you are afraid to touch the hand that feeds you.
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by krait
July 21, 2008 6:15 PM PDT
- One wonders if a field worker made any of the gross mistakes that many of our vastly overpaid CEOs have made lately what he/she could look forward to.How about a large pink slip
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