October 11, 2008

Do CEOs earn too much?

Filed under: Corporate governance — Nicola Rowe @ 8:03 pm



Do CEOs earn too much? Even in the 1960s, it must have been easy to say yes: in 1965, according to the Washington Economic Policy Institute, the typical CEO of a US listed company earned 24 times a worker’s average wage, working just two weeks to earn what Joe Schmo took home in a year of punching the clock.

Ah, those were the days. Today, those CEOs’ successors earn more than 260 times the wage of an average worker. Larry Ellison took home the better part of $193 million last year, once the IRS had snapped its jaws.

Many pixels have been pulled over why CEOs earn this much; undoubtedly, the reasons are varied – is it simply supply and demand? Do the risks of the CEO’s chair justify an enormous premium for taking it? – but scholarship has yet to serve us a satisfactory answer. Much more interesting, though, is this related question: never mind why CEOs earn so well – do they earn too much?

It’s a question that can turn up odd bedfellows. The claim that CEOs earn too much can rally the political left as a bloc and financially conservative investors individually. The reason is that there are really only two arguments that justify the claim that CEOs are overpaid: the argument from social justice, which says that it’s fundamentally unfair to pay one section of society so much more than another, and the argument, quite distinct in kind, that it is a poor use of shareholders’ money to lavishly pay a CEO who fails to deliver returns. Proponents of the former argument might object equally to the compensation received by Time Warner CEO Richard Parsons ($53 mio over the five years to May 2007) and that received by Ellison, above. But a shareholder advocate would probably only become enraged by Parsons. That’s because Time Warner underperformed the S&P over that period, its stock advancing 28 percentage points less than the index. Ellison’s Oracle, by contrast, beat the NASDAQ by more than 30% in the last half-decade.

So, next time someone tells you that CEOs earn too much, try to scry for their motives. Are they a socialist – or a shareholder? 


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