CEO Pay -- Part 2

A few months ago, I published a post called "CEO Pay -- Part 1" which essentially concluded that American CEO pay was completely out of whack and that there were better ways. I promised to expand on that assertion; hence, Part 2.

Let's start by looking at what is widely held to be the underlying principle; someone's pay should reflect their contribution. Two things about this deserve noting. One, this isn't only about CEO's, it applies to everyone. Therefore, CEO pay is necessarily related to pay throughout the organization, what we might call the hierarchical distribution of compensation. Two, contribution is not the same thing as pay (and this difference accounts for some of the ire over executive whatever.) The difference is that compensation is the whole package of received benefits, including year-end and other delayed rewards, whereas pay is "only" the dollars employees receive on a nominally guaranteed regular basis. In Part 1 of this post, I wasn't clearly differentiating between these. It would be nice to show that by total contribution, pay across levels is more readily justified.

But Maybe Not. The truth is, it looks even worse that way, much worse. It is instructive to consider what might happen if the CEO, aka the big boss, was missing, even for an extended period. If she's gone and not replaced, there's no hard data to show conclusively what happens, but no business has ever failed because the CEO was out sick or sailing his boat or sitting on dozens of boards, etc. I actually am quite convinced that much good can come when the cat's away. People try things they otherwise couldn't get permission for, meetings are more productive, and so forth.

You can't even claim that the CEO is being compensated for having built the business in the first place; that is rarely the case. CEO's just like other people, come into a going concern and simply pick up and benefit from someone else's work. And of course, when there's a turnover and someone is promoted into the top spot, they are suddenly assumed to have newly acquired magical powers immediately convertible into profits. Why else would their compensation suddenly triple?

Even if you believe that the CEO is fabulous, and some are, though often the turnover is a random event, it's hard to argue with a straight face that the CEO is actually worth 400 times what the average worker gets. And that's not counting all the perks that come with CEO-ness, like a staff of people devoted to your every wish, as much time off as you like, invitations to give the keynote at every large conference in the state. Etc. Of course, one comparison is particularly unhelpful to this American practice. In backward countries like Germany, Japan, Sweden, the UK etc, CEO compensation is perhaps a tenth or so of ours.

All in all. being a CEO is a great gig. Too bad more people can't have a go at it. Maybe picking people at random from the workforce would be an interesting experience. Give them a few days to warm up and I'll bet they'd do just fine.