August 14, 2016
Dean Baker
The Hankyoreh, August 14, 2016
It has long been obvious that the pay of top corporate executives in the United States is out of control. Chief executive officers (CEOs) were always well?paid. This is understandable since running a major corporation is a stressful and demanding job. But the ratio of CEO pay to that of a typical worker went from around 20 to 1 in the 1960s to 250 to 1 in the last decade.
While there are executives who are perhaps worth this pay – think of the innovations brought to the market by Steve Jobs at Apple – the vast majority of CEOs are not Steve Jobs. We got yet another example of a non?Steve Jobs CEO walking away with a huge paycheck when Verizon, the huge telecom company bought up Yahoo, an Internet pioneer.
According to calculations made Stephen Gandel, a reporter at Fortune Magazine, Yahoo’s CEO Marissa Mayer, will walk away with more than $120 million when the deal is completed. This number is striking both because it doesn’t appear that Mayer did much to boost shareholder value during her tenure at Yahoo, and also because it is very large relative to the size of the company.
While Yahoo has a market capitalization of close to $37 billion, the vast majority of the value of its stock stems from its holdings of Alibaba, the Chinese Internet retailer and Yahoo Japan, which is a separate publicly traded company. Essentially the company that Mayer controlled is the one that got sold to Verizon for $4.8 billion. If Yahoo shareholders could have expected a return of 7.0 percent a year on their shares (the long?term average for stock), the money paid out to Mayer was a bit less than 10 percent of their expected earnings. That’s a lot of money for Yahoo shareholders to be giving away to a single person.
CEO’s can get such outlandish pay packages in the United States because the corporate governance process has broken down. While the CEOs are supposed to work for the company’s shareholders, the people who most immediately determine their pay are the corporations’ boards of directors.
CEOs and other top management often play a large role in picking the directors who oversee their work. Being a director is good work, if you can get it. Typically it involves going to 6?12 meetings a year. For this trouble, directors usually get compensated between $200,000 and $400,000 a year. It is also almost impossible to be fired as a director. Even in the rare cases where shareholders do organize to remove directors, their colleagues on the board sometimes keep them around coming to meetings and collecting a paycheck.
In this context, a corporate director has very little incentive to ask a simple question like “can we get a CEO who is just as good for half the price?” In effect, the directors and CEOs are friends and it would be rude to scheme to pay your friend less money. For this reason there is little real market discipline for pay at the top. The pay packages of the Mayers and the Nardellis may prompt outrage, but it is unlikely that the typical CEO pocketing $15 million or $20 million a year is contributing that much to the increasing the value of the company’s stock.
This matters not only because one person may be ripping off corporate shareholders. The pay of CEOs sets a pattern throughout the economy. If the CEO is getting $20 million then it is a safe bet that her top assistants will also have pay packages well into the millions. And the pay structures in corporate America carry over into other sectors. It is not uncommon for the presidents of non?profit hospitals, universities, or even private charities to earn over $1 million a year. After all, they can truthfully say that if they managed a corporation of comparable size they would make much more.
The key to bringing CEO pay down to earth is to change the incentive structure for board members. They have to be rewarded for efforts to rein in CEO pay and punished for failing to do so.
The tri?annual shareholder votes on CEO pay provide one obvious mechanism for punishment. These “Say on Pay” votes were put into law in 2010. They are non?binding vote in which shareholders get to express their opinion on CEO pay packages.
As it stands there is no direct consequence for a pay package being rejected. Suppose instead that directors forfeited their salary of shareholders decided they overpaid the CEO? That might encourage clearer thinking on corporate boards.
Better yet, directors can be given a share of the savings. Cut the CEO’s pay and the board splits the half the savings, assuming the stock at least matches a peer group.
There are other ways to restructure incentives, but it should be clear we need some market discipline at the top. We have to find ways to do for CEO pay what CEOs have done for the pay of ordinary workers.
