writes FT columnist Michael Skapinker.
Chief executive pay is a scandal. It is too high, too complicated and has badly damaged the image of business. Even fervent defenders of free markets think top pay is out of control.
Simon Walker, head of the UK’s Institute of Directors, whose members are rarely heard humming “The Red Flag”, has said: “What has done the most damage to the reputation of business and the free market in recent years? It hasn’t been the G20 protests or the Occupy tent cities. It has been the greed of those who demand and secure rewards for failure in far too many of our large corporations.” ….
Defenders of the current set-up may seize on Mr Walker’s jibe about rewards for failure and say: “Ah, but what about all those successful CEOs who deserve their pay?” The … riposte is that there is little evidence that performance-related pay schemes are, in fact, rewarding performance. ….
There is no need for US chief executives to earn 296 times as much as the average worker or UK bosses 120 times. [Emphasis added.]
Michael Skapinker, “CEO pay: it is time for one brave leader to ask for less“, Financial Times, 20 May 2015 (metered paywall).
When corporate management worries about the gap between executive pay and the wages of workers, we have a problem. I wondered if corporate America has voiced similar concern. The Wall Street Journal (WSJ) is the US equivalent of London-based Financial Times (FT), so I searched for WSJ columns decrying high CEO compensation. I was unsuccessful, but I did find a column arguing that the gap is small, so nothing to worry about! (See the extract below.)
I seldom read the WSJ. Can a reader please pass on to me any WSJ article or op-ed that expresses concern with the gap between executive compensation and the pay of workers? Does one exist?
[T]he AFL-CIO and its aligned think tanks have made hay of the huge difference between the pay of CEOs and employees.
One of the most widely cited measures of the “gap” comes from the AFL-CIO’s Executive Paywatch website. The nations largest federation of unions laments that “corporate CEOs have been taking a greater share of the economic pie” while wages have stagnated for the rest of us. As proof, it points to a 331-to-1 gap in compensation between Americas chief executives and the pay of the average worker.
That’s a sizable number. But don’t grab the pitchforks just yet.
The AFL-CIO calculated a pay gap based on a very small sample—350 CEOs from the S&P 500. According to the Bureau of Labor Statistics, there were 248,760 chief executives in the U.S. in 2013.
The BLS [Bureau of Labor Statistics] reports that the average annual salary for these chief executives is $178,400, which we can compare to the $35,239-per-year salary the AFL-CIO uses for the average American worker. That shrinks the executive pay gap from 331-to-1 down to a far less newsworthy number of roughly five-to-one.
Mark J. Perry and Michael Saltsman, “About That CEO/Employee Pay Gap“, Wall Street Journal, 12 October 2014 (free access).
Wow! That is impressive shrinkage of the reported wage gap. I am not convinced, though. What counts is the gap between total executive compensation and the compensation of workers (who generally receive no compensation other than wages and salary). For highly-paid CEOs, income from salaries is a fraction of total compensation, which includes bonuses and company stock. Also, few are concerned with CEO compensation in companies that employ few workers, so the S&P 500 is not an irrelevant sample of firms to examine.
Perry and Saltsman were motivated to write an op-ed by introduction in Congress of the CEO-Employee Paycheck Fairness Act, a piece of Democrat legislation referred to the House Committee on Ways and Means at the end of January 2015.
The Act, in words of Perry and Saltsman, “would prevent a public company from deducting executive compensation over $1 million unless it also gives rank-and-file employees raises that keep pace with the cost of living and labor productivity”.
Mr Perry is a resident scholar at the American Enterprise Institute and blogs at Carpe Diem. Mr Saltsman is research director at the Employment Policies Institute (EPI), a front group created by Berman and Company, a Washington, D.C. public relations organization that lobbies for the restaurant, hotel, alcoholic beverage and tobacco industries. The EPI has no employees of its own, other than Mr Saltsman, who is also economist and researcher for Berman and Company.