September 24th, 2012

CEO Compensation Model based on Myths, not Facts

The exemplary New York Times business reporter Gretchen Morgenson discovered a clarifying report that exposes the method corporations use to overpay executives as pure fact-free myth. The evidence comes from two University of Delaware academics, Charles Elson and Craig Ferrere, at the Center for Corporate Governance.

The hypocricy is that executive compensation packages rise at obscene rates despite poor corporate performance metrics and an economy that simultaneously compels workers and unions to forego pay raises and to make economic concessions in the name of austerity.

The model used is called “peer-group benchmarking.” It is premised on fear by Boards of Directors in major corporations that they will lose their CEO to a competitor. In turn, that assumes that the wonderful CEO can jump industry to industry and spread his or her (still only 3% are women) magic pixie dust at any corporation and make it profitable. So, even the implied threat of leaving by a CEO triggers a survey of comparable CEO compensation packages, surveying the peer-group. Whenever one CEO wins an astronomical contract, every CEO peer group comparison is higher.

That’s how the current ratio of CEO:Worker pay is now 360:1. The average CEO is paid 360 times the average non-supervisory worker rate. Since income (or wealth for the non-working class) is how we define worth, the obscene ratio suggests that one person is 360 times more valuable than another.

The Delaware professors’ report describes that CEO talent is not transferrable as threatened. Most talent is firm-specific. When they do leave to work outside the industry they knew well, they fail.

The entire model of peer group benchmarking raises salaries of incompetent executives. At a time when pressure is mounting to make all teachers’ salaries dependent on “productivity” (student test scores), executives have no such pressure.

The bidding war for executives that drives up compensation rates is entirely manufactured. There is no bidding war, say Elson and Ferrere. The empirical evidence shows that few CEOs move. Download a copy of the full report.

So, here’s our modest proposal. Pay for performance for executives. Simultaneously pay everyone a living wage so that the “problem” of employee engagement can be put to rest. Employees are under assault while CEOs live like kings. With economic security, akin to what executives enjoy, who knows how happy and satisfied workers could be.


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This entry was posted on Monday, September 24th, 2012 at 9:59 am and is filed under Commentary by G. Namie, Employers Gone Wild: Doing Bad Things, Fairness & Social Justice Denied, The New America. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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  1. kachina2 says:

    Perhaps corporate governance should be examined critically and amended to require justification for either retaining the CEO or the hiring equivalent “value” worth of non-management workers at regular intervals.

    That simple exercise might keep stakeholders aware of issues relevant to the legitimate aims of the organization, and place a productivity expectation that currently doesn’t exist on executive functions. Raising the rate of compensation for workers might raise their sense of happiness and satisaction (which is irrelevant to corporations as they are not emotional entities), but I expect that the value apparent in employee engagement, retention, loyalty, and health WOULD be apparent in the financial picture (which does matter to corporations who are truly responsible to stakeholders). 

    Taxpayers (a group which would conceivably include more and more citizens) can start by demanding transparency and accountability for how tax dollars are being utilized in publicly provided services…and less “charity” would be required to ensure that citizens are able to lay claim to lifestyles that reflect fundamental human rights.

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