October 02, 2023
Robert Reich posted a table that tells us a huge amount about the U.S. economy.
CEO pay of the largest carmakers in the world
The reason this table is so informative is that the performance of these foreign automakers would certainly stand up well in comparison to the U.S. Big Three. (In fairness, Stellantis is largely a European company, headquartered in Amsterdam. But, its CEO gets U.S.-style pay.) So, the question is, why do U.S. companies have to pay so much more to get good help at the top?
The disparity in CEO pay does not reflect pay patterns in the economy more generally. The Bureau of Labor Statistics stopped publishing data showing hourly compensation costs internationally in 2011, but in that year, hourly compensation in manufacturing was considerably higher in Europe, and even slightly higher in Japan. Given the stagnation of manufacturing wages in the next decade, it is unlikely the story has turned in the U.S. favor in the last twelve years.
The most obvious explanation for the bloated CEO pay in the U.S. is that we have a corrupt corporate governance structure. It is obvious what keeps a check on the pay of ordinary workers. Management works very hard to ensure they are not overpaying assembly line workers, retail clerks, or administrative assistants. But who works to ensure that the company is not overpaying the CEO?
In principle, that is supposed to be the job of the corporate board of directors. But for the most part, by their own account, reining in CEO pay does not even seem to be on their list of responsibilities.
Top management typically plays a large role in the selection of directors. It is a very well-paying job, typically paying several hundred thousand dollars a year for a few hundred hours of work. Since directors see the management as their friend, and the best way to keep your job as a director is to stay on good terms with other board members, (directors nominated for re-election by the board win over 99 percent of the time), there is little incentive to ask pesky questions like “can we pay our CEO less?”
In Europe and Japan, typically banks have a large stake in major corporations. This makes them long-term shareholders with a direct stake in corporate governance. They are well-positioned to ask whether they can pay CEOs less. In other words, they can act to put a check on CEO pay in the same way that management puts a check on the pay of ordinary workers. And that is why the pay of CEOs of major European and Japanese car companies is 10-25 percent of the pay of the U.S. CEOs.
Bloated CEO Pay Matters
The issue of bloated CEO pay is not just a question of one person at the top of the corporate hierarchy getting more than they are worth. The high pay for the CEO distorts pay structures throughout the corporation and for the economy as a whole.
If the CEO is getting paid $25 million, then it is likely that the chief financial officer and others in the C-Suite are getting paid $10 million or more. And the third tier of executives might well be getting $2 million to $3 million. This picture would look very different if the CEO was getting paid the $2.3 million a year that Honda’s CEO pulls in.
And, this pay structure spreads to the rest of the economy. It is common now for presidents of universities or major foundations to be paid $2-3 million a year, with other top administrators often passing $1 million. They can argue for this sort of pay by saying how much more they would be getting in the corporate sector. That would not be true if corporate CEOs were paid $2-3 million a year.
And, to be clear this excessive pay is not showing up in big returns for shareholders. To take GM as an example, its share price is virtually unchanged since it went public again following its bankruptcy in the Great Recession.
In short, excessive CEO pay is a major drain on the economy. CEO pay is not related to their performance, even measured narrowly as returns to shareholders. From the standpoint of those of us not in a position to benefit from the bloated pay structures at the top, it is simply a tax, and a very regressive one.