Critical analysis of American’s CEO’s paycheck (blog)

Donald Rumsfeld, US Defense secretary 2002 while responding to the press questions about the situation in Afghanistan said, “There are known unknowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know”. Think twice! what does this mean to you? The answer is simple-the fundamental problem is not lack of information, but our limited ability to process it!

In the US today, the average CEO compensation is 300-400 times the average worker compensation (wages and benefits). The high inequality is behind the poorest health indicators and worse crime statistics of the US today. The goal of life is not to have our lives mean something to ourselves. The goal of life is to have our lives mean something to others. The American CEO is paid around 10 times more than their predecessors of the 1960s-moreover, the latter ran companies that were much more successful in relative terms than today’s American companies. Since they are paid 300 times more than the average worker-they should then add 300 times more value to the company! I know you may disagree with me while reading this but…….. If someone does not have the productivity to justify her high pay, market forces will soon ensure that she is sacked! The ratio of American CEO to average worker compensation used to be in the region of 30 to 40 to 1 in 1960s and 70s. This ratio has grown at a paid rate since the early 1980s reaching around 100 to 1 in the early 1990s and rising to 300 – 400 to 1 by the 2000s-yet the average hourly wage for the US workers in 2007 dollars rose from $18.90 in 1972 to 21.34 in 2006 according to EPI.

The view that what the CEO does is the only thing that matters for the organizational performance. Shareholders may be the owners of the company … but as the most mobile of the shareholders, they often care the least about the long term future of the company.   According to EPI (2000), Swiss and Germany CEOs were paid respectively 64 percent and 55 percent respectively of what their American counterpart received. The Swedish and the Dutch were paid only around 44 percent and 40 percent respectively of the American CEOs pay. Japanese CEOs only a paltry 25 percent wages in Japan and European countries are basically at the same level as those in the US. Swiss worker & the German worker get higher wages. (130 percent and 106 percent of the US wage respectively). Despite this, the American CEO is running companies that are no better, and frequently worse, than their Japanese or European competitors.

As Bebchuk and Fried (2000) states, “When Mattel CEO Jill Barad resigned under fire in 2000, the board forgave $4m loan, gave her additional 3.3m in cash to cover the taxes for forgiveness of another loan and allowed her invested options to rest automatically .She also received her benefits under her employment agreement which included a termination payment of $26.4million and retirement benefits exceeding $700,000 per year. 

It will take long to eliminate wrong managerial compensation practices in US. It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. Company departments should be designed to reward trust, solidarity, honesty and cooperation among their members. You can close one eye in the room full of darkness and ask yourself, can it be possible? Managerial classes In the US have become of the fat pay-check; they have been getting over the last few decades. They have come to control the boardrooms, through interlocking directorship and manipulation of information that they provide to independent directors, and as a result, few board of directors’ question the level and the structure of executive pay set by the CEO. Good companies are run on trust and loyalty, rather than suspicion and self seeking. The managerial classes have gained enormous influence over the political sphere, including the supposedly center-left party. 

Today, the reality is that winners are being picked all the time both by the government and the private sector, but the most successful ones tend to be done in joint efforts between the two. For instance, the Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state directions.  The US economy needs indicative planning which involves the government setting some broad targets concerning key economic variables-working with, not against private sector. We can, and should, change the rules of the stock market and the corporate governance system in order to restrain excessive executive pay in limited liability companies. There is need to impose the Korean policy of state support of new industries and services-regularly report on some key aspects to their businesses. The government picking winner strategy which was mostly successful in Japan is also highly welcome. During the deliberation councils in Japan, government officials and business leaders would regularly exchange information through formal channels in the presence of the third party observers from academia and the media. We deliberately restrict our freedom of choice in order to reduce the range and the complexity of the problems that we have to deal with. Again, we can think about this!

``Edwin.