The ratio of the pay of corporate chief executive officers (CEO) to ordinary workers has exploded in the last 40 years. It was a bit over 20 to 1 at the start of the 1970s, now it is well over 200 to 1, and in good years for CEOs, it can be more than 300 to 1. Steven Clifford’s book, The CEO Pay Machine (Blue Rider Press) is an effort to explain how this happened and what we can do about it.
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Clifford’s basic story is that the process that determines pay has become hopelessly corrupted. At the most basic level, the corporate boards that are supposed to represent shareholders and put a check on CEO pay have little interest in doing so. Clifford describes a process of whereby boards are captured by CEOs and other top management. Being a board member is a cushy job, typically paying well over $100,000 a year for around 150 hours of work a year, by Clifford’s calculation. With many boards paying $300,000 or $400,000 a year, the pay can be in the range of $3,000 an hour.
And, as Clifford notes, it is almost impossible to get fired from a board by shareholders. More than 99 percent of the directors who are nominated by the board for reappointment win their election. Furthermore, the boards are typically used to working with the CEOs. The CEOs and their staff are the ones who provide them with information. Often the CEO himself is a board member, usually the chair.
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Clifford dismisses the idea that CEOs are worth anything comparable to their current pay. He argues that the inequality created by bloated CEO pay is destructive both to the companies themselves and to democracy. I would add to Clifford’s list of complaints that excessive CEO pay contributes to a distorted pay structure throughout the economy. After all, if a moderately competent CEO of a mid-sized company can pocket $5 million a year, then certainly the president of a major university or non-profit foundation is worth at least $1 or $2 million. And more pay for these people means less for everyone else. That is how arithmetic works.
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Clifford cites several major studies indicating that pay is not closely correlated with returns. He notes that pay is often associated with a large element of luck, such as the CEO of an oil company getting a huge payout because the share price of the company surged along with world oil prices. Clifford also points out that CEOs are generally not especially mobile. They have firm-specific skills, so even a hugely talented CEO may not have a good second option if her current company won’t agree to a big raise.
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If the basic problem is a corrupt corporate governance structure, then the solution must involve reforming the governance structure. This means changing the incentives for directors and restructuring the voting process so that insiders do not tightly control it.
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The other issue is changing who gets to vote in shareholder elections. As it stands now, the fund managers that act as trustees for shares held in mutual funds often cast the majority of votes in shareholder elections. These managers have no direct interest in holding down the pay of CEOs. In many cases they have ongoing business relationships with CEOs who they count on to keep them informed of developments with the company...
