by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Charles Murray highlights for the American Enterprise Institute an interesting take on rising pay for CEOs. He starts by quoting a “fan letter” about his book Coming Apart. That letter comes from a corporate director and former CEO.
We can’t disregard the fact that the revenues, earnings and scope of a Fortune 500 company today are integral multiples of those of decades ago, and they continually grow, which would account for some increase. But so much? And so uniformly without much regard for performance?
Thank our regulators and corporate governance efforts to reduce CEO compensation through disclosure and oversight of board decisions. I’ve been a long time observer of public companies and a reader of their proxy statements. In 70’s and even the 80’s the compensation of the CEO seemed to be mostly a matter arrived at between the board and the CEO that resulted from discussions and negotiations and the public disclosure was a matter of a few pages. But there was then nothing like the pressure to conform to best practices backed up by the reliance upon the advice of consultants and the concommitant availability of market data that there is today.
You can guess how it works. No board that isn’t about to fire its CEO really wants to admit that their CEO is a less-than-average performer by paying him or her less than average. But if the lowest-paid CEO’s are always being brought up to the average, then the average increases every year. Then for the high performers to be paid well, their compensation needs to be increased, but that raises the average… and so on every year. And the compensation committee and the board always have this market data before them, the recommendations of their consultants and “best practices” to adhere to. These influences are not easily resisted. You see the result.
Like many regulatory unintended consequences, it’s hard for me to see an easy way back. But it’s more than an academic question if you are a director serving on a compensation committee.
The same dynamic has been operating in every field, including sports and entertainment, where compensation is made public. Public disclosure of CEO pay and a requirement to provide a rationale for that compensation is indeed “a perfect recipe for increasing compensation.” Unintended outcomes strike again. And yet there’s not the slightest chance that CEO compensation can be made a private matter.