Why We Need Highly Paid CEO’s: Why Do People Resent Overpaid CEO’s but not Overpaid Stars?
The article below is very long, therefore I’ve only included some excerpts but it does make a very good point, so if you have the time, go to the link and read it.
We keep hearing about the evil CEO’s and how they are overpaid compared to the normal working people, about how they are abusing the ‘system’ to keep getting richer. But this article points out really well the realities of business. Yes, some of them may be evil and should be dealt with, but that does not mean that the majority are corrupt. In fact, most of them are NOT corrupt.
Then comes the issue of their being overpaid. I agree that some of them make an obscene amount, but as you’ll see in the following article, maybe they really are worth it. You do get what you pay for.
Why is it that we don’t mind movie or sports stars making unbelievable amounts of money but we mind CEO’s making a lot? Do you really think Jennifer Aniston or Tom Hanks DESERVES 20 million dollars per film while the camera guys get WAY below that? Yet, no one says anything about it. Why? Because folks say “as long as people are willing to pay the bucks to see these stars, they will continue getting the money”. Movie companies and sports clubs are willing to pay these huge amounts because these stars are making them BIG bucks!! So why should we look at CEO’s any differently? As long as people are willing to pay for their product, they are providing a service and making money for all the stockholders, which is their job, so how can we be angry?
Next time you hear someone ranting about CEO’s, ask them if they feel the same way about their favorite movie or sports star because, as far as I’m concerned, those folks make a ridiculous amount of money!
And they’re doing it while not working as hard as CEO’s, getting long periods of time off, getting tons of perks and freebies, and then usually giving nothing back to society. In fact they usually lead disgusting lifestyles.
So either lay off the CEO’s or treat the stars the same way!!
Are Business Executives Overpaid and Corrupt?
by Michael Medved
…Publicity for executive indulgence (even without flamboyant touches like vodka-spewing ice sculptures) always serves to reinforce the notion that corporate chieftains constitute a class of selfish, shallow, preposterously pampered and ludicrously overpaid parasites.
During periods of economic hardship, corporate leaders inevitably inspire rage and resentment because they seem so powerfully isolated from the suffering that afflicts the rest of us; during years of growth and prosperity they draw comparable hostility for their “disproportionate” or showy share of national success. When the economy goes down, it’s easy – and almost irresistible – to blame business leaders. When indicators turn upward, on the other hand, those executives rarely get credit. Conventional wisdom associates economic recovery and boom times with natural cycles or the plans and programs of some popular politician. We assume that progress occurs in spite of the greed and selfishness of corporate bosses, with no real connection to their pursuit of profit.
According to embittered critics of the market system, the most glaring evidence of that cheating and corruption comes from the swelling pay disparity between workers and bosses.
There’s no evidence at all that cutting the compensation of Wal-Mart CEO Mike Duke would magically raise the wages of his 2,100,000 employees, but levelers like Ralph Nader pay far more attention to the privileges of those at the top of the corporate ladder than they do to the welfare and advancement of those at the bottom. According to the Census Bureau, median household income went up from $41,613 in 1982 (in inflation adjusted dollars) to $59,233 in 2007—a hefty increase of more than 20% and providing a significant addition of $8,620. At the same time, the earnings of the typical CEO as compared to an average U.S. worker went up from 30-to-1 (it was never the nostalgically remembered 7-to-1 recalled by Ralph Nader) all the way to 344-to-1, according to the liberal advocacy group United for a Fair Economy in a much-discussed 2007 study.
More recently, Madhukar Angur, Professor of Marketing at the Flint campus of the University of Michigan, examined executive compensation at top U.S. corporations and found little evidence of systemic plunder of big companies by greedy CEOs. As he wrote in Investor’s Business Daily (March 23, 2009): “Recent research, however, suggests that this abuse of corporate finances may not be as prevalent as it seems. Indeed, over 40% of the 94 U.S. corporations I have studied had CEO compensation generally based on proportionate increase or decrease in company’s net worth or paid less to CEOs despite an increase in company net worth.” Professor Angur saw this surprising tendency to cut CEO pay even when they led thriving companies as a healthy sign of an economic system swinging back to balance and shareholder control. “Given that nearly a third of the top Fortune 100 companies paid less compensation to their CEOs despite an increase in the companies’ net worth, that suggests that the threatening economy has kick-started corporate governance and other self-regulatory systems in a significant number of U.S. companies. If this trend continues, the nation will see more companies tying CEO compensation to corporate performance. The end results might be more sustainable business and renewed public trust.”
One savvy and respected observer from the left side of the political spectrum takes the courageous position that the breathtaking increase in CEO compensation actually makes perfect sense, given deeper changes in the American marketplace. “There’s an economic case for the stratospheric level of CEO pay which suggests shareholders- even if they had full say – would not reduce it,” writes Robert Reich, the outspoken Labor Secretary under Bill Clinton and now a professor of public policy at the University of California at Berkeley. In the Wall Street Journal (September 14, 2007) he predicted that these shareholders were “likely to let CEO pay continue to soar. That’s because of a fundamental shift in the structure of the economy over the last four decades, from oligopolistic capitalistic to super-competitive capitalism. CEO pay has risen astronomically over the interval, but so have investor returns.”
Reich perceptively compares the corporate heads of today with those who ran major companies in the 1950’s and 60’s, when even the most powerful business leader “was mostly a bureaucrat in charge of a large, high-volume production system whose rules were standardized and whose competitors were docile. It was the era of stable oligopolies, big unions, predictable markets and lackluster share performance. The CEO of a modern company is in a different situation. Oligopolies are mostly gone and entry barriers are low. Rivals are impinging all the time – threatening to lure away consumers all too willing to be lured away, and threatening to hijack investors eager to jump ship at the slightest hint of an upturn in a rival’s share price.”
He compares the shift to the much-discussed changes in the movie business. Fifty years ago, eight big studios utterly dominated the United States market, shutting out all would-be competitors and comfortably dividing the available audience among them. These secure, well-established companies became household names, signing the biggest stars to long-term, exclusive contracts and thereby limiting their competition. As Reich notes: “Clark Gable earned $100,000 a picture in the 1940’s, roughly $800,000 in present dollars. But that was when Hollywood was dominated by big-studio oligopolies. Today, Tom Hanks makes closer to $20 million per film. Movie studios – now competing intensely not only with one another but with every other form of entertainment – willingly pay these sums because they’re still small compared to the money these stars bring in and profits they generate. Today’s big companies are paying their CEOs mammoth sums for much the same reason.”
Secretary Reich cites the storied (and controversial) pay out to Lee R. Raymond, chairman of Exxon Mobil, who retired in 2005 with a compensation package totaling nearly $400 million, including stock, stock options and long-term compensation. “Too much?” Reich asks. “Not to Exxon’s investors, who enjoyed a 223% return over the interval, compared to the average 205% return received by shareholders of other oil companies, a premium of about $16 billion. Raymond took home just 4% of that $16 billion.”
In other words, under the circumstances, even a pay day of nearly half a billion dollars can represent a real bargain for exceptionally gifted (or lucky) CEOs. Professor Angur notes that “using company net worth as the basis of performance measures, Jack Welch, the former CEO of General Electric, is considered underpaid. Through his unique leadership style and business acumen Welch took the company’s worth from about $14 billion in 1981 to $500 billion just before retiring.”
As Robert Murphy noted at Townhall.com: “In our increasingly global economy, certain individuals are incredibly productive and can command incredibly high earnings as a result. Corporate executives really do perform valuable tasks, and it really does make a difference who is running the company. Once we concede that productive individuals will earn more than less productive ones, the fact that some make 364 times what others do is largely irrelevant. After all, a TV set might be 364 times more expensive than a gumball. Is that ‘unfair’ or does it merely reflect the forces of supply and demand?”
Hodak sympathizes with the sense of outrage that afflicts lower-level employees at major companies with head honchos who earn millions. “I know it’s hard for someone making $50,000 a year to imagine that anyone can be worth 10 or a hundred times that. But they might be. How do I know? Because if I don’t pay them, someone else will. When an executive across the table tells me, ‘The guys down the street are offering $2 million a year,’ he’s not bluffing. The experienced buyer of managerial talent can see the difference between a $500,000 executive and $2 million executive as surely as a home buyer can tell the difference between a half-million-dollar home and a $2 million home.”
My former law school classmate Robert Reich— who has argued for forty years for activist government, higher tax rates and closer corporate regulation– nonetheless recognizes that executive salaries reflect basic realities of supply and demand, rather than the back-scratching indulgence of some insider old-boy network. “The pool of proven talent is small because so few executives have been tested and succeeded,” he writes in the Wall Street Journal. “And the boards of major companies do not want to risk error. The cost of recruiting the wrong person can be very large – and readily apparent in the deteriorating value of a company’s share. Boards are willing to pay more and more for CEOs and other top executives because their rivals are paying more and more for them.”
As both a Berkeley academic and a former member of the Clinton cabinet, Reich has never been shy about deploying the power of some federal bureaucracy to achieve some worthy goal, but he shuns the idea of utilizing such a mechanism to limit compensation packages in the business world. Not even the most ambitious and audacious reformer would support the notion of forcing salaries and bonuses to match some concept of the intrinsic worth of work. As Rob Preston argues in InformationWeek (January 13, 2007): “If salaries were just about the importance or perils of the work, teachers and nurses and power plant technicians and soldiers would be pulling down the big bucks. That they’re not doesn’t mean they’re any less critical; it just means that employers could find more of them at the pay they now earn. Water is cheap because it’s abundant. Gold is expensive because it’s not. Which is the more critical commodity?”
In the long run, however, only one effort can insure profitability and prosperity: reliably providing to others some good or service which they need or want, and for which they are willing to pay with the fruits of their own labor. In this sense, every successful executive becomes a benefactor to his customers, as the free market system compels service to your neighbor.
That’s why business bashing usually falls flat when Americans have the chance to put the anti-capitalist messages in context. In the midst of presidential primaries of 2008, the widely-admired former CEO of General Electric, Jack Welch, (in collaboration with his wife Suzy, former editor of the Harvard Business Review) responded to a demagogic Democrat from North Carolina who said, “For the past seven years, we’ve had a President who has stood up for corporations. It’s time we had a President who stands up for you!”
“You, who?” the Welches asked. “Who are these ‘you’ people, we wonder, who aren’t part of business in some way? Sure, some portion of the population is made up of students, government employees and workers in the nonprofit sector.
“But let’s be real. The vast majority of Americans make their livelihoods from business, and not all of them are faceless, bloodless, megabonus-earning executives on Wall Street. They are the field workers of Big Oil, toiling in some of the harshest conditions on earth, from the oil sands of Canada to the high seas off the coast of Norway. They are the immunologists and oncologist of Big Pharma, hunkered down in their labs trying to find cures for AIDS and cancer.
“They are immigrants from Ecuador and Vietnam, running the restaurant around the corner or launching a high-tech venture in their garage. Our point is, corporations are not a bunch of buildings. Like all businesses, they are flesh and blood. They are human beings. And most of the time, they are human beings trying to make the world a better place for their families and employees….
“Business isn’t the enemy of people –it is people. And business doesn’t destroy hope. It creates it.”