US Based CEOs Are Overpaid - Essay Example

US Based CEO’s Are Overpaid Marianne Bertrand observes that Chief Executive officers (CEO’s) have received more attention than any other group of individuals in the world. This is owed to the fact that they are perceived to be the key decision makers in the economy through the corporations they run. Their popularity can also be attributed to the high pay, high social class and the prestige that comes with being a CEO. At times, their popularity is fuelled by the enormous earnings they receive yet some of them are deemed not to do their work properly. (Marianne, 2009) In historical perspective, the CEO’s salaries have been staggering. Since the mid-1970’s, for roughly 40 years, the pay of top executives rose at a modest rate. However, executive compensation started shooting up tremendously in 1980 and this pace even accelerated in 1990’s. Notwithstanding dipping in the stock in the early 2000’s, the CEO’s, the CEO’s package has continued shooting higher. An average CEO of a large company in the US earned around 24 times the compensation of a typical worker. (Jacob and Paul, 2010) In the mid-1980’s, at the time of the economic boom, US executives were being paid the most lucrative salaries in history and this continued even during recession in 1990’s. This was perceived as unfair to both laid off employees and stockholders. (www.findarticles.com) Up to 2003, the American Chief Executives average compensation rose by a factor of about six in America’s top five hundred companies. Their average pay reached around eleven million per year inclusive of the value of the options. This is not comparable to CEO’s pay in any country. For example, Swedish Chief Executives received roughly a quarter of their American counter parts. In 2007, the CEO’s pay accelerated towards three hundred times that of a typical worker. Executives of top companies made more than twelve million US dollar in that year. (Tyler, 2006) Scholars Xavier Gabaix of Massachussetts University and Augistin Landier of the stern school of business argue that American executives are not overpaid. They suggest that increase in the value of stock market largely explains the high packages of Chief Executive officers. This argument is simple. It suggests that more economic value is created by better executive decisions. If the number of good executives is less than the number of big companies, the value of the executive talent will be pushed up by competitive bidding. Thus, the value of Chief executive officers compensation packages results from competitive pressures and not the exploitation of shareholders. These two scholars argue further that when the capitalization of a given sector is high, Chief Executive Office compensation will be high too. This is because a stronger sector means bidders for CEO’s of a particular kind. This translates to CEO’s in large industries receiving more, even after the current companies size is adjusted for. CEO’s salary variance from country to country can be predicted by use of the total value of companies in a sector. For example, in France, executives in top companies have fewer opportunities outside in comparable companies compared to their American counterparts and thus receive fewer amounts of compensation packages by a factor of 2.4 to 1. It is argued by critics that chief executive officers cheat their public shareholders. However, private companies also pay their executives very well. In addition, the productivity growth rate has been the envy of the world which can only mean that chief executives in the US, who are indirectly involved in driving the economy, are doing something right. (Tyler, 2006) It is not surprising therefore that many people perceive Chief Executive officers in America to be overpaid. This is because their salaries are set by corporate boards often made up of friends and insiders. Executive’s compensation packages are not transparent at all mostly when complicated compensation plans and stock options are used. It has also been observed that their pay is not always linked to performance. For example, just less than a year before Enron’s collapse, Kenneth L Lay, the chief executive then, was receiving a compensation package of eight million dollars plus perks in 2000. Jacob S Hacker and Paul Pierson in their book, winner -take-all politics argue that chief executives earn a fat package because they once were much more valuable in their previous companies. This however, is a wrong argument. This is because the executives pay is set public policy in a deeply distorted market. They drive up their own pay by taking advantage of corporate governance systems that allow them to do so. They create conducive conditions for bidding wars that are not balanced and prevent all from understanding everything except for a few privileged insiders. Over the years, political leaders have promoted a system that allows enormous autonomy to executives which includes indirect control over their pay. This of course alongside failure to update regulations in governance has led to high earnings for executives which is sometimes uneconomical to the corporations they serve. Americans chief executive officers receive a pay that is more than double the average of other rich states where pay takes a different form. American chief executive officers receive their highly lucrative pay in short term stock options which lack transparency to shareholders and help create quick market gains through creative accounting, restructuring and job-cuts. Although stock options are used in other rich countries, they are linked to long term performance as well as to the performance of the firm in relation to industry norms. Thus, those options in the rich countries are designed such that chief executive officers only receive extra compensation if only the performance of their firms exceeds industry average. This clearly indicates that American chief executives are overpaid. (Jacob and Paul, 2010) In conclusion, it is my opinion that it is not fair to say that all chief executive officers pay is excessive. Putting compensation levels into context, most corporations their chief executives well but fairly. However, 20 percent approximately receive a compensation package that can be said 2 b excessive. This translates to 80 percent of chief executives receiving the fair compensation contrary to critics’ allegations that the executives pay has gone to the roof. Work Cited. Betrand Marriane, Article on CEO’s annual reviews 2009. Retrieved 30 April 2011 http://www.annualreviews.org/doi/abs/10.1146/annurev.economics.050708.143301?jo urnalCode=economics Bill Leornard CEO compensation packages tied to performance, 1994. Retrieved 30 April 2011 http://findarticles.com/p/articles/mi_m3495/is_n4_v39/ai_15426335/ Jacob S Hacker and Paul Pierson Winner-take all politics, Simon and Schuster, 2010 p62- 63. Tyler Cowen, A contrarian look at whether American CEO’s are overpaid, 2006. Retrieved 30 April 2011 http://www.nytimes.com/2006/05/18/business/18scene.html Read More