The topic of my report is the myth about American chief executives being overpaid. To start with, the idea that American bosses are obscenely overpaid dominates in the modern society. For instance, Among the true believers in this consideration are the NY times and Forbes who complain of fat paychecks awarded to CEOs who don’t deserve them. What is the basis of this orthodoxy? Actually it rests on three propositions First and foremost – CEO pay just keeps on going up The second one – the fact that it is not tied to performance of the company and the last but not least – that boards are not restraining their appetite.
Altogether these propositions in turn rest on a bigger argument: that CEOs are using their political power to tamper with the system. The article highlights Steven Kaplans opinion as recently he has published a research regarding the problem. Above all, it should be noted that he distinguishes estimated and realized pay. Estimated pay is t Estimated pay is the estimated value of the CEO’s pay, including stock options, when the board does the hiring. Realised pay is what the CEO actually makes when he exercises his options.
In fact Steven Kaplan disproves practically all the arguments given above. First, He questiones the idea that CEO pay always goes up by providing data which shows that, it shot up between 1993 and 2000. But since then it has fallen. Average estimated pay for the bosses of S&P 500 companies has declined by 46% since 2000. Furthermore, turning to relationship between pay and perfomance Mr Kaplan argues that CEOs are clearly paid for improving the performance of their company’s stock.
Firms with CEOs in the highest 20% of realised pay generated stock returns 60% greater than those of other firms in their industries over the previous three years. Firms with CEOs in the bottom 20% underperform their industries by almost 20%. CEOs are also kicked out if they fail to perform well. Thus Mr Kaplan provides a valuable corrective to much of the rhetoric that surrounds this subject. But two questions remain troubling. One is about short-termism. Many critics of CEO pay argue that the problem lies not with the size of the pay packets but with the incentives that they create.
Many bosses receive options that are worthless unless the company’s shares reach a certain price, but fabulously lucrative if they exceed it. This may spur them to take big risks to boost share prices in the short term, and then cash out. But if their bets go sour, other shareholders suffer. According to the author of the article, it would be better to pay bosses in restricted shares, which they must hold for a specified period rather than choosing when to sell. The second question concerns the political economy of inequality.
It is one thing for CEOs to earn $10m a year when the economy is booming, but quite another when unemployment is 8%. For example, the CEOs of such companies as CBS, Oracle and Viacom all earned more than $50m in 2010. Bosses should not underestimate the risk that their riches could provoke a backlash against business. Nevertheless, there is no quick fix. Some fat-cat floggers want governments to regulate pay to reduce inequality within firms. Other reformers say the way to deal with high pay is to give more power to boards or shareholders.
The Dodd-Frank law of 2010 required all public firms to hold an annual “say on pay” vote for top executives. However last year, despite a lot of noise by activists, shareholders voted to uphold 98% of pay proposals. Finally, The evidence suggests that CEO pay is determined mostly by supply and demand, not bad corporate governance. The thing is that Companies compete for scarce talent. They pay what it takes to woo the best bosses, and sack them if they stumble