Yes, CEOs Get Paid Too Much
I have an acquaintance who owns a small manufacturing company; he’s the President and CEO. He is one of those hard-working CEOs who is trying to match up purchase orders with invoices in the morning and working with lawyers and commercial realtors to negotiate a long-term lease in the afternoon. He recently told me that his company has purchased a very large machine that he needs to remove from its present location, transport here to Northeast Ohio, install at his operation, rebuild, and put it into operation. And, oh, yes…the machine is large enough so that he needs to construct a new building to house it.
He expects that all of this will take his full attention for the next year. He also anticipates that the machine will open global markets in the field of renewable energy that wasn’t available to him before. That new business will provide his present employees with security and will enable him to add more operators and technicians to his workforce. All of these jobs are high-wage positions with good benefits.
I don’t know what salary my friend takes from the company. I do know that, given the task in front of him and his colleagues, it won’t be nearly enough. I’m fairly certain that his salary isn’t the same as any of the CEOs of any S&P 500 firm. They earned $15M on average. That’s 264 times the median wages at those same companies. I’m sure that my friend very much deserves the salary he did take from his company (assuming that he took one).
Too Many CEOs Make Too Much
Those S&P 500 CEOs? We can be just as certain that they did not earn their compensation. They weren’t worth what they were paid. My friend added value to his company and our community. Many of the CEOs of the S&P 500 did neither. Nor did many of the CEOs in the top 350 companies in the US by revenues.
CEO pay has increased by a factor of 10 over the past 40 years. Meanwhile, the growth of total factor productivity has been almost flat. In other words, CEOs are getting paid more (LOTS more) while the productivity of the companies they lead is growing only slowly. No one is arguing that CEOs and front-line workers should receive the same compensation but should officers who once ran successful companies for 25 times the median wages in their companies now receive up to 300 times those wages?
But Maybe They Deserve It?
Some argue that such highly-paid CEOs deserve more pay than do workers because their jobs are “larger”. Large companies are complex entities; effectively developing and executing a successful strategy can be difficult and risky but when those risks pay off, everyone wins.
Others maintain that CEOs should be paid more because their skills are in short supply.
None of these arguments holds water. Studies show that companies, on average, do well or do poorly, independent of their CEO. Company performance has more to do with luck than with anything CEOs do.
Research Says “No!”
Arturo Bris and Maryam Zargari studied 3,700 CEOs in over 2000 firms in 22 countries during the period from 1991 to 2019. (1) The researchers found that, on average, CEOs affect the firm’s performance, not at all. Some CEOs do well, others do poorly. They found evidence that CEOs who do well, do so in companies that were doing well anyway. CEOs in companies that were doing poorly actually managed to destroy value; those troubled companies would have been just as well off hiring someone off the street for workers’ wages to lead the firm. The belief, then, that there is a relationship between the CEO and the firm’s performance and that CEOs should be compensated in fashion is false.
All to say, while many of the tens of thousands of CEOs across the country very much deserve their pay, a large number of the highest-paid don’t. Not only don’t they deserve their pay, but it’s not wrong to say that they are stealing from shareholders and employees.
So, Why Should We Care?
Why should any of us care about this? If CEOs are getting paid more than they are worth, so long as I am getting paid what I’m worth, where’s the rub? High CEO pay is evidence of an inefficient market for CEO skills. If organizations are using resources inefficiently in one place, that needs to be made up somewhere else. That “someplace else” could be research and development, capital expansion, shareholder dividends, or employee wages. CEOs at the 100 S&P companies that have the lowest median wages saw their own pay jump by 29% last year during the pandemic. In any case, the business suffers because of extraordinary, unwarranted CEO pay.
Also, motivation theory tells us that rewards must be commensurate with performance. If I’m paid extremely well regardless of my performance, what motivation do I have to improve it? Further, when all the folks in the organization who aren’t the CEO see that compensation isn’t based on merit, what does that do to their motivation to achieve?
Finally, when we consider that those CEOs are being taxed at rates lower than their secretaries, we see that society suffers. We’re paying for goods that the CEOs and their organizations benefit from. If they were paying their fair share, our share would go down or we could buy more goods, e.g., broadband for rural citizens and food for hungry city kids. Conservative writer Jonah Goldberg argues that the CEOs and their ultra-wealthy cohorts shouldn’t be taxed heavily because their wealth is in the form of assets rather than, you know, twenty-dollar bills. He illustrates the unfairness of taxing the ultra-wealthy on their ultra-wealth by asking if our baseball card collections should be taxed. Well, if my collection is worth a billion dollars and I use it as collateral for sweetheart loans to buy private jets and homes in Bermuda, then, yes, my baseball collection should be taxed.
Laws Restricting Pay Don’t Work…But Here’s What Would
All that said, we probably shouldn’t pass legislation that constrains an organization’s ability to pay anyone in the firm whatever it wants to. Such policies as have been tried along those lines haven’t worked well. Rather, we should let those boards compensate their CEOs as much as they’d like in whatever form that they’d like (e.g., valuable baseball card collections), then tax those baseball card collections. We can predict that conservatives will engage in a lot of pearl-clutching when we suggest that the wealthy pay their way, claiming that they’ll simply stop creating and investing altogether and the rest of us will be out of jobs, starving in the streets. Just like what happened back in the 1950s and 1960s when marginal tax rates were north of 70%, right? But increasing taxes on the very wealthiest CEOs is a popular policy. Further, small increases in tax rates on income and on wealth for the top 1% would raise a lot of money. The conservative American Enterprise Institute reviewed studies that showed an increase in revenues of at least $2T over ten years and that assumes very aggressive tax avoidance measures by the very rich. That would be enough for the entire infrastructure bill proposed by the Democrats.
So, yes, too many CEOs make more than they should. Aided and abetted by their friends on their company boards, they’re stealing from employees and shareholders. They are pocketing their outsized and undeserved compensation but they’re not adding value to their firms or society as a whole. The answer, though, isn’t to pass laws that restrict their employers’ ability to loot the company’s coffers on their behalf. They’ll just figure out a different way to break into the vault. The answer is to tax some of those ill-gotten gains and use those funds to help sick and hungry kids.
1 Bris, Arturo, and Zargari, Maryam, A Bullshit Job? A Global Study on the Value of CEOs (March 16, 2021). Available at SRN: https://ssrn.com/abstract=3805610 or http://dx.doi.org/10.2139/ssrn.3805610