There is a new book that has sparked my interest, titled "The CEO Pay Machine." In 1978, an executive at a large American company was compensated at 26 times what the average worker was being paid. At present time, that compensation has exploded to 300 to 700 times what the average worker is paid, or more. J.C. Penney and Chipotle are examples of executive compensation that is exponentially greater than what the average worker is paid. Wage stagnation of blue-collar workers is not a subject I wish to dwell on, it is an obvious fact whose consequences I have elaborated on countless times. According to the non-profit think tank Economic Policy Institute, “Wage stagnation for the vast majority was not created by abstract economic trends. Rather, wages were suppressed by policy choices made on behalf of those with the most income, wealth, and power.”
The review “Excess at the Top” of the book “The CEO Pay Machine” in The Wall Street Journal describes the CEOs making astronomical sums thusly: “These aren’t founders of major shareholders but hired guns, managers playing with the house money.” So many of apologists for the excessive pay are insisting that it’s the global economy that is creating this situation, and we’re just going to have to accept it. The apologists, however, aren’t very well informed of the average worker versus CEO pay differences. The U.K., the fifth largest economy in the world, the pay ratio of average worker to CEO is 84 to 1. Let me point out that 84 to 1 is nowhere near the 300 to 700 to 1 found in America. But let’s not stop there, shall we? In Japan, the third largest economy in the world, the pay ratio of average worker to CEO is 16 to 1. So much for the “global economy” argument.
According the author of “The CEO Pay Machine” Steven Clifford, says, to quote The Wall Street Journal: “The outsize income, he thinks, feeds inequality and mistrust in our democracy.” Could the mistrust have led to the election of a Washington outsider, fueled by the anger and resentment of people who were supposed to be leading, and were simply taking all they could get, without consideration for the people whose toil and sweat generated wealth? I would offer a resounding yes to that premise. Further, the review notes: “a system of compensation has emerged over the past four decades that rewards mediocre executives by stiffing shareholders, employees and society at large.”
Ah, yes, society at large. The present compensation plan, where wealth concentrates in just a few hands, and then is distributed in the economy in small, limited sectors, whereas if it were in the hands of employees and shareholders, it would be distributed much more diversely and have a much greater impact on the economy at large. Of course, those that hold the millions in compensation put it in banks and such, but if the millions were distributed to thousands of small economic players, the money would flow through many more hands. Take any country you want in our “global economy” where wealth is concentrated in the hands of a select few, and you will see a country where poverty is rampant. I’m not a socialist who believes in taking money from the wealthy, but too much concentration in the hands of a few never has nor will ever result in a prosperous society. Pick any country you would like, it just doesn’t happen that way.
So how to the CEOs get this compensation you ask. The book describes “compensation consultants” who wish to get in the good graces of the potential CEO so that they can design pension and health-care plans, to name but a few aspects of the money generators that the compensation analysts earn. So the “compensation consultants” objectively recommend healthy and high salaries so that they get the next assignment to set up other compensation plans. After salary comes, of course, short and long-term incentive plans. Those plans can be as diverse as reorganization or just doing what is expected of a CEO. Les Moonves, the CEO of CBS, was paid in 2014 a cash bonus of $25 million, of which almost half of that bonus was mostly just doing his job. Failing to meet the goals that are established can result in the lessening of bonuses. So if you didn’t hit the numbers, instead of $1 million, you only make $900,000, not bad for not hitting the numbers, wouldn’t you say? Increasing the stock value, even if only short-term, is the goal of almost every CEO, and is the basis of their compensation. Per the article: “It turns out, though, that stock awards and bonuses often don’t align the interests of managers and shareholders; they encourage short-term boosts to earnings rather than investing for long-term growth.”
The book mentions Milton Rock, who is described as the “godfather of compensation consultants” who started comparing executive pay between companies. As the review points out: “Few executives can transfer their talents from one company to another, let alone from one industry to another, and yet they are paid as if they are basketball free agents.” J.C. Penney, taking a computer executive and having him direct an old brick and mortar retailer is pure living proof that talents do not automatically transfer from one industry to another.
Bill Clinton and the Democratic Congress tried, in 1993, to cap executive salaries, making salaries in excess of $1 million no longer tax deductible, linking executive pay to performance, with performance pay being the new tax-deductible expense. Of course, with that change in the law, to no one’s surprise, performance compensation went through the roof. Every time the government has tries to tax executive compensation, the accountants and the lawyers got together and figured out another way to pay the CEOs more money, be it performance or stock options.
My favorite quote from the book: “Apart from the galaxy of Zork-El corporate directors are the only sentient group who think that CEO pay levels are justified.” An important question to ask is if a CEO is already making millions of dollars, how much more motivation do they get from a few more million? There are plenty of millionaires who simply have no incentive to go out and work anymore, as they are already wealthy beyond any expectation. No names necessary here. The economic rules for millionaires are different than the working class. As far as the working class, those who say money is a poor motivator understand neither money nor motivation.
Of course, there are CEOs who deserve what they get paid, and do not let it be said I object to all of them and what they get paid, I don’t. There are people who turned around companies, and then there are people like Jeffrey Immelt of GE, who has made multiple millions for years and never, ever restored GE’s stock price to what it was before his leadership. Some people are just lucky, like when in the early eighties the economy bounced back and the GM executives gave themselves healthy bonuses. My question was then, what was it that they had done to improve the cars, which were nothing to brag about, and were nothing much more than they were before, but, like a lot of people, if they were standing around when something good happened, they got to take credit for it. And of course they got the money, too. There are plenty of people who create value, and I have no intention of disparaging them, but they aren’t just the folks in the offices during the day and the country clubs on the weekends. There are people who have taken risks and they paid off, as many entrepreneurs have shown us. There are just as many who were, as the review stated, “playing with the house money” with nothing much to lose. As Pierre Corneille said, “To win without risk is to triumph without glory.” I consider “The CEO Pay Machine” one of the more important books of 2017. The impact of wage disparity on business, the economy, and society in general needs to be examined, and it cannot happen too soon.