One More Time: How Goes Executive Pay?

The NYTimes had a recent story, The Infinite Pool of Executive Pay. It is  a little hit and miss. The report  comes down on the increase of 18.7% percent in corporate perks. But then we also learn  that overall median pay for the  top 100 CEOs  increased by just 2.8%. However, I had a devil of a time resolving this with the following direct quote:

Still, the data reveal the contours of executive pay packages. Besides the jump in perks, overall cash compensation also made a comeback, rising 19.7% percent, to $5.7 million. Cash bonuses jumped 25 percent.

Hunhh ? But perhaps this was deserved because “the typical company’s stock [was] returning 17 percent to shareholders.” Having just seen a report from the NYTimes about corporate governance and compensation levels going awry, one wonders what  point the NYTimes was trying to get at.

The Public knows only too well that corporate financial malfeasance,  taking their cue from the Untouchables on Wall Street, is continuing unabated and worldwide. And because key government officials are implicated either by lobby/campaign payments  or by “sharing in” tax havens, then they are reluctant to press the  issue. This has to be considered a logical conclusion given the huge $650million in financial campaign funds and lobbying expenses paid [see table below from OpenSecrets]. Thus  the failure of both the Democrats and Republicans to prosecute criminally  financial executives  is scandalous. But executive pay levels are even worse.

Rank Sector Amount Dems Repubs  To DEMS  To REPUBS
1 Finance/Insur/RealEst $656,923,622 24.8% 51.9% $162,718,879
2 Other $559,782,061 46.2% 41.9% $258,427,579
3 Misc Business $459,051,032 26.6% 39.6% $122,239,283
4 Ideology/Single-Issue $314,441,938 40.4% 43.1% $127,148,563
5 Health $260,528,381 33.7% 42.3% $87,832,041
6 Lawyers & Lobbyists $247,543,360 61.9% 29.8% $153,216,959
7 Communic/Electronics $202,587,915 46.3% 27.2% $93,734,321
8 Labor $141,187,722 43.1% 4.3% $60,908,165
9 Energy/Nat Resource $138,705,629 15.9% 63.9% $22,106,674
10 Construction $122,934,201 20.2% 50.6% $24,893,334
11 Agribusiness $90,592,526 22.4% 66.0% $20,297,484
12 Transportation $77,048,762 21.7% 69.0% $16,747,472
13 Defense $27,428,125 39.6% 59.6% $10,851,398


And perhaps the greatest misdemeanour is the pay that Executives reward themselves:

What this Forbes chart shows is open mischief in executive compensation. And this is not because the chart  above pokes fun at  executive pay  which defies the market credo of “Pay for Performance”. If that were true the biggest heads would be at the top  and the gradually decreasing to the smallest at the bottom. But since there is  no correlation between  performance and pay [see the Economist’s take here] the Little-Performance-TopExecHeads are mixed in with the Big-Performance-TopExecHeads.

Nor is the problem with pay due to that fact that US Top Executives earn roughly double the World average:
And the trend has just taken a interesting twist  in Switzerland where the Economist reports:

PUBLIC wrath at the widening gap between packages awarded to company bosses and the average citizen’s take-home pay resounded through Switzerland on March 3rd. Voters there overwhelmingly backed an initiative to give shareholders of Swiss listed companies a binding say on executive pay and an annual right to vet board appointments. Other sanctions would forbid the award to executives of severance packages, side contracts, and rewards for buying or selling company divisions. The penalty for infringements could be as much as three years in jail, or the forfeit of up to six years’ salary.

Now Swiss executives are at the World average pay level; but still the Swiss voters demanded tough controls be granted to Swiss shareholders. But the real problem is Executive Pay dwarfs average worker pay.

Executive Pay at 100’s of times Average Worker Pay

It is the Forbes chart above that gets at literally the heart of the problem with current executive pay levels – the ratio of top executive compensation to the average worker pay. The trend is hockey stick up and away as seen in this Economist graph:
Historically executive pay has been about 20-25 times that of the average worker pay in a company. But since the early 1980’s that ratio has shot up to 50 then 100 and as high as 400 times the average worker pay. In the US,  Consumer Consumption makes up 70% of the economy but average income is declining except for the top 1% wage earners where the increases are in the high teens just about every year.

Top Executives: Paid as if Infallible

So extravagant executive pay is helping to reduce Consumption in the US Economy. The fact that top executives have been madly outsourcing jobs and automating operations just worsens the problem of dwindling average worker pay and therefore reduced overall Consumption. As rational managers these CEOs should know better – Henry Ford did.

And the fallacy of current executive compensation is substantiated by pragmatic  business management practice. Six Sigma Operations theory indicate that to justify earning 325 times the average worker pay in 2012,  top executives would have to perform at roughly the 18 Sigma  level. Well  the  6 Sigma  level means that an executive will make 3 1/2 defective decisions in a million in comparison to the average worker. This is near infallibility. But at 18 Sigma top executives are being paid  for ridiculous levels because they should be delivering no defective decisions whatsoever. Just ask the JCPenny, MF Global, and Hewlett Packard shareholders if they are getting  infallible performances out of their top executives.


So yes, US executive pay is way out of line. There is no correlation with performance, twice the world average for executive pay and at a supposed level of infallible decisionmaking that even the Pope would want the executives to confess as utterly undeliverable. But what really rings hollow is the management dictum that business today requires constantly focused tight team efforts and decision making. So now, top executives   how do you tell that team of yours that you,  having gotten the team  to work double overtime, they  are now to be rewarded at 1/325th of your pay? Its like watching a hokey episode of CBS TV’s Undercover Boss. Also please tell employees and shareholders what management theory justifies this misbehaviour.

So I suspect the Swiss got the referendum on Executive pay right.

Finally, lets put to rest the knee-jerk GOP accusation that raising taxes or cutting CEO pay is “Class Warfare”:
Cartoon by Steve Sack Minnesota Tribune
First, from the Washington Post we know that in total taxes paid to all levels of government as % of their income, the 1% super rich pay 1% less than the rest of the top 20% income earners and about 1% more than the middle class average. So the Financial and CEO Super rich do not bear an unfair government  tax burden. Next, the Federal government annually dispenses about $100Billion in “Corporate Welfare” according to the Cato Institute helping CEO’s performance. And the NYTimes has just estimated that state and local government, already cash strapped, give up annually an additional $80 billion/year to corporations. And of course, there is the $1.2 trillion secret FED special payments to banks and corporations beyond TARP during the financial crisis that help fend off either bankruptcy or prohibitively high PayDay Loan like interest charges. But even more amazing is the fact that most corporations do not need the cash they are now hoarding – businesses have accumulated nearly $6Trillion in cash and short investments over the past 5 years.

It is very telling that in the early 1990’s when a second wave of automation, job outsourcing plus turning a blind eye by the Chamber of Commerce and other business associations towards use of illegal immigrants by a wide range of small to medium size businesses – all these measures started to lower wages across the board. So it is no wonder that by 2000 Middle Class wages stagnated At that same time Executive compensation crossed the 80 times worker pay or the 8 Sigma level of supposed near infallibility in executive decision making. So if the Occupy Wall Street and other Middle Class reactions are to be branded as Class Warfare – just remember, the War was started 20 years ago  by Business and the Financial+Executive elites and has continued unabated even during recessions to the detriment of the US Economy – no more so than now when Business elites attacks wages, benefits and jobs while rewarding themselves  ever so generously while getting themselves labelled as “Job Creators”.