CEO/Employee Pay Ratio

Economic Management
CEO/Employee Pay Ratio

This is a hotly discussed issue of late.  The ratios can be high with public company CEO’s being compensated an average employee’s annual wage within the first day of a year’s work.

Some argue this is a sign of a breakdown of society as the share of society’s output going to chief executives is rising far faster than the overall income of society and definitely faster than the compensation to employees.

This imbalance, these might claim, leads to depressing consumer demand and social unrest.

Others argue this is an example of market forces at work and highly qualified and successful people must be retained by employers or lose out to competitors, both at home and abroad.

The imbalance, these others might argue, may well right itself over time, but in the meantime in a world short of talent, this is the cost of remaining competitive.

I do have questions that I have not yet seen anyone express an expert opinion on.

Whereas a great many chief executives are also on boards of directors of not only their own employers but on boards of directors of other competing employers, might this argument of “let the market decide” not be somewhat self-serving?

Don’t we have, in effect, chief executives making decisions about not only the compensation of other chief executives, but about chief executive compensation levels generally?

Furthermore, don’t these chief executives move among employers, from chief executive post to chief executive post within that relatively small cohort?

Do chief executives move internationally and experience the same pay ratios in all developed countries?  If not, do those countries with reduced pay ratios have less successful executives with lower returns to shareholders, lower market shares, lower innovation and lower productivity?  If not, why not?

So why is this not a case of a skewed market wherein chief executives and members of boards of directors are sitting on both sides of the bargaining table at the same time, in effect, at least indirectly in conflict of interest in negotiating compensation for chief executives?

As we see in the resources below, shareholders, securities regulators and securities exchanges, along with the general public, are all taking an interest in this issue, most particularly in the aftermath of the financial meltdown of 2007/2008.

Governance is interesting isn’t it.

Mike Klein

Resource links:
http://www.forbes.com/sites/halahtouryalai/2013/08/27/how-wide-is-your-wage-gap-new-rule-would-reveal-ceo-pay-vs-employee-pay/2/

http://www.bloomberg.com/news/2013-09-17/ceo-to-worker-pay-ratio-disclosure-proposal-to-be-issued-by-sec.html

http://www.economist.com/blogs/graphicdetail/2012/05/ratio-ceo-worker-compensation