What Executive Pay Really Means

Executive compensation compared to average wage is a reliable indicator of the economic injustice in America today, in my opinion. But it is the fact that the gap between average pay and executive pay has been widening for decades that we should pay attention to. Even more important is the lowest pay, which keeps people in poverty.

Excessive executive pay is justified by claiming such gifts are necessary to attract top talent. However, equally talented CEOs in Japan, Korea and Europe assume equivalent responsibilities for a quarter of the pay. It is often the case that actual performance has little to do with CEO compensation in the US, and it appears to be negatively correlated with social and environmental responsibility.

In 2010,  the average CEO of the Fortune 500 earned $11.4M.
Average national income was about $0.035M ($35K).

CEO pay has increased in double digits each year for the past few years, at a time when the economy has been in a tailspin and the average wage has fallen. On Wall Street, felonious activity was rewarded with gifts that defy reason at the worst of it. CEOs are frequently given outrageous bonuses for failure. Even on the rare occasions when they are tossed out entirely, they usually leave with gifts of tens of millions. In other words, executive compensation is unrelated to their performance.

But what has people looking through the garage for their old pitchforks is the comparison to workers’ pay. To the mass of people who have seen their pay plateau or fall, or who have been tossed on the scrap pile for life when tens of thousands are “let go”, outrageous CEO pay looks very much like a reward for creating misery. When we learn that half of the population is now living in poverty or close to it, we are convinced: this outlandish pay does not serve the interests of the people of the USA.

The AFL-CIO maintains Executive Paywatch. Here’s one of their comparisons, which is a clear and graphic comparison (click for a clearer chart):

Make no mistake, persons who take on the responsibility of managing a large corporation must have talent, and they should be well paid, even very well paid. But I am not convinced that other intelligent, experienced, interested persons willing to risk ulcers could not do as well, and for a fraction of the cost. In fact, pay being unrelated to performance, why pay $11.4M for pay unrelated to success?

In 2010, John Hammergren, CEO of healthcare provider McKesson, had the highest income in the country, at $145-million, and the average CEO of the Fortune 500 earned $11.4M. Average national income was about $0.035M ($35K). So Hammergren’s income was 4150 times the average. This is how it looks:

Who

CEO pay

Multiple of Av. Pay ($35K)

Av. Pay ($35K) as % of CEO Pay

Hammergren

$145,000,000

4150

0.024%

Average CEO

$11,400,000

326

0.300%

Hypothetical CEO

$4,000,000

114

0.870%

Hypothetical CEO

$1,000,000

29

3.500%

Remember Ivan Boesky? It’s said that he would order half a dozen dinners costing hundreds, then send away all but one. Why do we find this morally abhorrent? I believe it’s because of his attitude, that of someone who has no idea what money represents, that he somehow “deserved” to squander hundreds of dollars every time he ate. Gary Larson, in Doonesbury, once called it “sickening excess”. That says it for me.

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