A few days ago, I overheard a conversation in Sharples deriding the large salaries of corporate CEOs. At an open-mic night some weeks prior, a speaker disparaged “greedy billionaires.” An acquaintance of mine once recoiled at the mention of large companies. It seems that some Swarthmore students have an aversion to “big business” and the wealthy people at its helm. But is such an aversion warranted? Let’s examine the extent to which greed is a factor in executive compensation.
Corporate CEOs are an easy target. They fit neatly into the stereotype of the evil top-hatted bourgeois overlooking the mass of suffering workers. It’s true that many CEOs have incomes exponentially higher than those of ordinary employees and that sometimes the gap is surprisingly large — yet the same can be said of elites and regular workers in media, athletics and music. Prominent actors and actresses earn tens of millions each year; star NFL, NBA and MLB players all receive annual pay comparable to or greater than that of corporate officers. In 2004, the ten American CEOs with the highest salaries averaged $59 million, but the ten highest-paid actors, singers and personalities averaged almost $120 million each. Henry Paulson, then-CEO of Goldman Sachs, received a $16.4 million compensation in 2006 — that year, Shaquille O’Neal earned $20 million playing for the Miami Heat while Tom Cruise received a total of $75 million from initial pay and film proceeds.
Consider the following: if all the members of a popular football team were suddenly replaced with inexperienced nobodies, sales would drop, attendance would plummet and the team would quickly fade from prominence, if not disappear completely. The high salaries of professional athletes are not arbitrary. They are awarded in expectation that the cost of payment will be exceeded by the revenues the athletes produce. The same can be said of actors and actresses; indeed, some actors are notorious for demanding exorbitant sums per film. They only receive this pay because a film’s production team values their acting enough to agree. The reason all of these individuals receive so much money in a given year is because their employers estimate the value of their services to that amount.
Likewise, the high pay of a CEO is usually determined by the corporate board’s assessment of the executive’s success. Underpinning the indignation at corporate pay is the assumption that a CEO does not deserve that much money. But why do spectators, who almost certainly do not have the expertise to make an accurate appraisal of a CEO’s work, get to say how much money he or she is entitled to? More often than not, individuals who designate a particular salary do so because, having assessed the state of the company and its assets, they believe it matches the quality of the CEO’s performance. The decisions of powerful executives affect hundreds of thousands of people, billions of dollars and a wealth of assets. Their salaries approximate the gravity of their obligations.
In 2006, the highest-paid CEOs in the United States worked for companies owned by massive financial conglomerates — the organizations least inclined to give up their money without good reason. Financial firms are just as, if not more, “greedy” than CEOs. They have no desire to dish out millions to anyone unless they are convinced that the expense is in their interest. Lobby though they may, most CEOs working for these institutions don’t get much voice in the size of their remuneration. They have to demonstrate to their superiors that their services are valuable. On average, only 20 percent of a CEO’s annual compensation is the base salary — sometimes much less. Executive pay consists mostly of bonuses and stock options rewarding success. If the executive does poorly, he or she is much less likely to be given a bonus and risks being fired and replaced.
As with other labor, the skills required of a CEO are quantifiable and are subject to fluctuations in supply and demand. If a firm needs a talented supervisor or prescient investor to manage its affairs, it will provide a higher salary in its attempt to attract talent. Suppose a failed CEO with a compensation of $20 million is removed due to poor quality. The board adjusts the compensation to $30 million and attracts a skilled manager who reverses the company’s downward spiral and saves the firm $300 million. The increase in the CEO’s salary benefits more than just the person in that position: the new guy gets more money, obviously, but the shareholders’ investments are secure, the corporation is profitable again, and the company’s employees keep their jobs. The $30 million salary reflects the value of the service provided.
It is odd, too, that there’s so much resentment toward corporate leaders but comparatively little toward heirs to fortunes. Some turn out to be quite popular: the Kennedys, Rockefellers, Roosevelts, du Ponts and Saltonstalls have all been elected to powerful offices by comfortable margins. Inheritors acquire riches simply for being born into a wealthy family. If a CEO stops working, he won’t acquire anything from his firm.
My aim here is not to dismiss all concerns associated with executive compensation. Naturally, there are cases in which a CEO is overpaid or extorts money. But I would caution against sweeping rhetoric correlating “greed” and high salaries. You could be the greediest person in the world, but if you can’t deliver, chances are you won’t last long. While many Swarthmore students go on to work at non-profits, government jobs and charitable organizations, others do enter the business world. It would be wise to bear in mind that, even at the summits of titanic conglomerates, the rules of the market remain.
The only people the CEO of a public company should answer to (regarding compensation) are the shareholders and the Board of Directors. The general public has no more right to complain about a CEO’s pay than they do of the allowance of a stranger’s child.
The problem with this is that the board members who are responsible for determining the pay of CEOs are appointed by the CEO. Also, the CEOs prefer to take their income in the form of stock options because the tax rate is lower on that than salaried income.
With sports players, they are more like commodities than self-determining businessmen, so it is not a fair comparison to make. Their pay is based on what the owners and GMs determine the free-market value of each player is, and any little setbacks will doom their career. If another player is marginally better than another, then that is incredibly valuable on the playing field and is thusly compensated. A salary cap exists that limits the amount a player can earn, despite research that shows that some athletes, such as LeBron James, bring a vastly greater economic profit to the team than what is reflected in their paychecks. They are not the same as CEOs as they are the product that is sold (in the form of ticket sales, apparel, TV deals, etc) and so should actually be compared with the things these big businesses bought, rather than their upper management. The owners of these teams are the ones who truly profit, without proportional increases to the pay of players (as seen by the $2 billion pricetag Donald Sterling just got for the Clippers).
There is no such market for CEOs and no way for others to directly compete and offer equal or slightly less effective skill sets for lower salaries (supply and demand!). This makes it so that compensation can increase at a faster level than it would if there were competition and unbiased “employers”.
Not to say that I’m against “big business”, but sports are not a fair comparison and your economics are a little flawed. I’d suggest taking a Sociology class with Professor Stephen Viscelli if you want to learn more on the topic.
P.S. I wanted to agree with your point about Tom Cruise being overpaid, but the fact that a little 5’7″ Scientologist can be seen as a viable action star who can defeat massive henchmen is a skill worthy of the highest of compensations.