The Hype Regarding CEO Compensation

A few comments here:
1)  The argument around CEO compensation is usually focused on the wrong details.  Yes, some CEOs make a considerable amount of money.
But the issue isn't so much that they make a lot of money but how their
salaries are approved.  The lack of oversight regarding CEO compensation
is the real culprit here.  Boards hire compensation consultants who
award large salaries in order to be hired again the next year.  
Additionally, boards lack motivation to restrict excessive salaries.  
Salary compensation is not going to decrease until shareholders decide
they don't want to spend such large sums for a CEO.

2)  Why doesn't anyone ever complain about the salaries of athletes,
celebrities, or movie stars?  Arguably these entertainers have less
of a "real world" impact than the heads of major corporations, and
yet we never hear a critique of their salaries.

3)  Another question I have for those who complain about CEO
salaries is - "and what would you have the President do about it?"
CEO compensation is not a presidential issue.  It isn't even a
governmental issue.  Do you really want the government deciding
the upper limit of income?  And if you start distinguishing between
different positions, isn't that blatent discrimination?  Are we going
to go after business owners next because "hey, they make too
much money"?

4)  Obama's hyperbole is not uncommon.  I am passing along this article
because a) it is superficially interesting and b) readers should be critical
when they hear politicians cite "facts" and make vague statements
about inequality.  All men are created equal - it doesn't mean they
enjoy equal lives from that point forward.  The government should
not be in the business of ensuring equal outcome for all.  The result
of that course is an equally bad outcome for all.

Obama, CEO Pay, and the Politics of Class Envy
By Lee Cary
Populism uses the politics of discontent. Barack Obama's recurring comparisons between CEO and average worker salaries is a class-warfare play on resentment with just enough truth to make it work with many voters.

Senator Obama has made frequent reference to the spread between CEO compensation and average worker pay. For example:

1. January 20, 2008, "The Great Need of the Hour" speech on MLK Day

"We have a [moral] deficit when CEOs are making more in ten minutes than some workers make in ten months."

2. Radio ad in the Texas primary race

"Some CEOs make more in 10 minutes than some American workers make in a year."

3. April 11, 2008, REUTERS article quoting Obama in Indianapolis

"Some CEOs make more in one day than their workers make in one year."

The parameters for Obama's comparison continue to drift, but few notice. His is not an exercise in mathematics. It's an appeal to voter discontent.

When a politician bemoans the salary-disparity on the Jay Leno or David Letterman Shows the crowds applaud. Never mind that Jay makes $123,000 and Dave $154,000 for each show - considerably more than the average U.S. worker makes in a year. Entertainers, including sports figures, are exempt from salary comparisons. They have talent. And never mind that Obama has leveraged his support from Oprah Winfrey to gain votes. At an annual income of $260,000,000, The Oprah makes a million dollars per weekday.

Obama's floating pay equations have generally been specious. Here's how.

Let's start with the average annual salary (AAS) for a U.S. worker as computed by the San Francisco Chronicle using U.S. Department of Labor statistics: $39,795.33 (Q1 2005). We could use CNN's computation of a 2006 AAS of $29,544, but they relied on the Institute for Policy Studies and United for a Fair Economy; that lower figure factors in both full- and part-time salaries. Therein is a challenge with computing comparative salaries; not only do the numbers lag behind the calendar, but some sources spin the numbers to support their policy agenda. In October 2005, a third source put the ASS at $40,409. We'll use $40,000 as the ASS to test Obama's equations.

Forbes placed the aggregate pay for the CEOs of the top 500 U.S. companies at $5.1 billion, or a CEO average of $10.2 million. Another source notes that the range of 2005 CEO pay is from $10-15 million. We'll use the higher number - $15 million.

In all of Obama's equation he uses the word "some." It's a word that baths generalizations in the warm waters of perceived accuracy. If, for example, you own twin pug dogs that are the only canines that ever learned to play checkers, you could rightly say, "Some dogs play checkers." But, truth be told, most dogs don't. Obama has said this,

1. "We have a [moral] deficit when CEOs are making more in ten minutes than some workers make in ten months."

Here's the math: The 2005 AAS for 10 months was $33,333.33. Based on a 40 hour week, a CEO making more than $33,333 in ten minutes ($3,333.33 per minute) would have a weekly (2,400 minutes) salary of about $8 million and an annual salary of about $416 million. How many CEOs met that qualification? The answer is (drum roll here) - none. According the Forbes, the highest CEO salary for 2005 was Yahoo's Terry Semel at $230 million. (He's right there in Oprah territory.)

2. "Some CEOs make more in 10 minutes than some American workers make in a year."

Oops. This equation pushes the "some" CEOs annual salary up to nearly $500 million. That's equivalent to about what the top three highest paid CEOs made in 2005 combined. So this equation is clearly bogus. Then, finally, Obama lowers the numbers.

3. "Some CEOs make more in one day than their workers make in one year."

Okay, now Obama is into reality with his math, although he was careful not to put the word "all" before "their workers." But, some CEOs do make $10.4 million a year. In fact, as we've seen, that's about the average for the top 500 companies. Some Obama supporters do even better, including Steven Spielberg, who makes $110 million a year; George Clooney, $25 million; Matt Damon, $24 million; Will Smith, $31 million -- and good for them. CBS News reportedly gave Katie Couric a five-year contract making $46,149 per evening news broadcast. So Ms. Couric receives more for 20-odd minutes of teleprompter reading than the AAS of U.S. workers. You suppose CBS News has aired any stories on the disparity between CEO compensation and worker pay?

Where's Senator Obama going with all these sliding comparative equations? The answer is that he's appealing to class envy.

It's not as though the spread between CEO compensation and worker pay isn't already under considerable scrutiny. For a review of proposed and passed legislation pertaining to executive compensation see here. And, for a comprehensive overview of the issue you can read "Excessive CEO Pay: Background and Policy Approaches," a February 2007 publication of the Congressional Research Services (CRS). Here's a summary from that report describing how the government has been addressing the issue.

"There have been two general approaches to executive pay reform. First changes to securities laws and regulations have attempted to strengthen the bargaining position of shareholders by (1) requiring more complete and comprehensive disclosure of CEO pay, (2) making boards more responsive to shareholder interests, or (3) requiring direct shareholder approval of executive pay packages. Some of initiatives are the result of regulatory initiatives, while others are or were legislatively based. Second, Congress has tried to restrain the growth of executive pay by eliminating the tax deduction for compensation paid in excess of specific caps." (p. CRS-3)

So it's not as if Senator Obama is doing the nation a public service by surfacing an issue that's been ignored. No, he has another agenda.

Quote #1 above came from Obama's MLK Day speech wherein he said, "Unity is the great need of the hour. Unity is how we shall overcome." But exploiting class envy is not a unification tactic. It's a divisive tactic and represents the same old liberal politics of discontent. It offers no vision for the future of the nation except friction and stridency.

In the wake of Senator Clinton's attempt to exploit Obama's recent statement about small town Pennsylvanians clinging to guns and religion, Obama said, "Shame on her." In this case, it's shame on him.