There has been perennial outrage at the high levels of compensation that CEO's
have gotten since the early 1990s when the Democratic Congress decided
to penalize corporations for any wages over $1 million unless tied to
performance. That is when corporations found dozens of ways to outrage
Congress and many others, by raising CEO compensation far above anything ever seen before.
Inside the executive world the prevailing current argument is that CEOs do much more good for the world (with hundreds and thousands of employees) than movie stars, Oprah, and highly paid athletes; and CEOs carry far greater burdens every day of the week. It is also argued that CEOs are in a competitive field just like senior electricians but at much higher rates.
Both
of these arguments are valid but they don't slake legitimate complaints
about CEO salaries. There are two problems that are different from the
celebrity star argument and the competitive wage market argument.
(1) The wage scales of executives under the CEO are effected by the CEO's compensation. Thus a rise in CEO compensation raises everyone elses or else, with too great a disparity, discourages and drives out subordinates. For a good understanding of this I quote Jeff Imelt the CEO of giant General Electric: "The key relationship is the one between the CEO and top 25 managers of the company, because that's the key team," ...Immelt has said in recent interviews. "Should the CEO make five times, three times or twice what this group makes? That's debatable, but 20 times is lunacy," he added.
Last year, Mr. Immelt received $3.3 million in base
salary, $5.8 million in bonus and $396,267 in other compensation, as
well as other plan-based awards valued at $4.7 million at their grant
date. His compensation, he has said, was in "the two to three times the
range" of GE's other 25 top executives.
The top executive wages also trickle down very fast to the entire company and raise everyones wages, making the company less competitive in open markets or more costly for the consumer in monopoly markets.
(2) The argument that the market for CEOs is a competitive market is hard to defend because there are only a few thousand CEOs and it is almost impossible to argue that there is a standard level of competence as there is with senior electricians. (continued in the next blog).