CEO Pay Isn't All That Out of Whack If You Look at Real Data
No one should shake a can outside of a supermarket to raise money for CEOs. They do just fine, and that's great news. Many have worked hard, made customers' lives better through solid products and services, hired workers and built value for their shareholders. That deserves to be rewarded through compensation. Despite what unions might tell you, the CEO of a fast-food chain should make a hell of a lot more than the guy dipping french fries in oil, just as my boss should make a lot more than I do.
Yet, every political season we find candidates looking at CEOs as enemies of the people, trying to ride the surfboard of populism to victory on the hustings. The latest is Donald Trump -- notwithstanding his role as a wealthy CEO -- who called CEO pay "a total and complete joke" in an interview on CBS's Face the Nation.
"It's very hard if you have a free enterprise system to do anything about that," Trump said. "You know the boards of companies are supposed to do it, but I know companies very well and the CEO puts in all his friends...and they get whatever they want you know because their friends love sitting on the board."
He does have a point. CEOs don't set their own pay. That's done by boards and the marketplace. In fact, in corporate governance, it is the primary responsibility of any board of directors to monitor leadership, decide how they are performing and figure out what that's worth.
But it is the "worth" part that trips up most people looking at pay from the outside. Managing a company of any size is hard work. It takes leadership. It takes good decision-making skills. It takes a certain level of experience and education.
As a result, compensation can't be compared with the general worker population. It's asinine to say someone with no college education who operates a cash register should somehow, in some illogical formula, set the pay of the CEO of a company who has far more responsibilities and got to that role through dedication, experience and vision. Yes, workers have families to feed, too, but that doesn't automatically mean they should receive higher pay simply because of their lot in life. They have to earn it, and free-market, capitalist systems allow for people to rise on the merits of their labor, and give people an equal shot of success despite not guaranteeing an equal outcome.
In all the stories about the so-called "wealth gap" and income disparity, most pundits and politicians use bogus data. Look at Hillary Clinton. Over and over again, she repeats the phrase that the average CEO makes 300-times more than the average U.S. worker. Great soundbite, but it isn't actually true.
As the nonpartisan Factcheck.org noted, Clinton is relying on bad information peddled by the liberal Economic Policy Institute. It looked at CEOs from the top 350 companies in America -- you know, the giant, publicly traded ones that employ millions of workers -- and found they make, on average, $15.2 million a year. That includes the variety of ways the largest companies have to compensate executives: bonus, stock options, long-term incentive payouts, and the like. They then divided that number by the workers at all levels through those companies and -- voila! -- the "average" CEO makes 295.5 times more than the "average" worker. Horrors.
People who took a moment to look at that data would see the obvious flaw: There are way more than 350 CEOs in this country. In fact, according to the Bureau of Labor Statistics, there are 246,240 chief executives in the U.S. The average wage of those CEOs is $180,700, not $15.2 million. The average wage of all workers is $47,230. That's a 3.8-to-1 ratio, not 300-to-1. Perhaps Mrs. Clinton accidentally deleted a calculator program from a computer server somewhere. Mistakes happen.
CEOs (and their pay) are not the enemy. Most CEOs don't run giant corporations. Most CEOs are building smaller enterprises. Sometimes they start a company, it becomes huge and they make a bundle. More often than not, they fail. The good ones get back up and start all over again. They build products. Those products have the potential to change people's lives. Those products help companies grow, help improve pay and create jobs for workers. And those products are worth higher compensation than their own workers.
Why do CEOs get paid so much? Because they deserve it. Plain and simple.
Having said that, some CEOs are overpaid, but it has less to do with the amount of their paycheck than with their awful performance. Look at the criticism of Marissa Mayer, the CEO of Yahoo, and her compensation. Mayer made $42 million in salary and other compensation last year -- and that came even as she fell short of financial targets. Now, with questions about the tax implications of the company's spinoff of China's Alibaba and continued poor market performance, some observers are wondering why she is getting such lofty pay while shareholders suffer. Scott Galloway, a professor at NYU Stern School of Business, said in a recent interview on Bloomberg radio that Mayer "is the most overpaid CEO in history.”
That could be true, but it isn't up to Mayer to give back money, nor is it up to Yahoo workers to decide what she should be paid. Instead, it is up to the board of directors, who represent the shareholders. In the case of Yahoo, the board may not be performing its duty well. (Galloway, for his part, said Yahoo's board doesn't want to fire Mayer because of her pregnancy.) Other boards disrespect their shareholders by phoning in the job. H. Carl McCall, the former New York State comptroller who was head of the New York Stock Exchange's compensation committee at the time chairman Dick Grasso was criticized (and ultimately ousted) over a $120 million payment, infamously admitted a $48 million payment to Grasso had "escaped his attention."
It is that inattention that is inexcusable, not executive pay. Trump, in his CBS interview, said as much, saying cronyism led to packed, too-friendly boards that curry favor with executives. Corporate governance at all levels -- whether it be a startup board, a nonprofit or a Fortune 500 giant -- demands that board members act on behalf of the stakeholders they serve, not the executives of the organizations themselves.
CEO pay is not the problem. If anything, executives, with some exception, are paid exactly what they're worth. Neither Hillary Clinton nor Donald Trump turned down a check for their services or business for being "too much." They shouldn't indict the business community for doing the same thing.
Ray Hennessey is the former editorial director of Entrepreneur.