Thursday, June 30, 2016
Overpaying America’s CEOs
Using statistics supplied by the federal Bureau of Labor Statistics, the AFL-CIO found that the average CEO pay of a major US corporation is $12,259,894 while the average worker in those companies is $34,645, a ratio of 354 to 1. Narrow that category of companies to America’s 200 largest corporations, and that CEO pay level rises to $19.3 million (Gretchen Morgenson writing for the NY Times, June 17th). The AFL-CIO also numbers looked at the ratios around the world. The UK ratio is 84 to 1, Germany 143 to 1, Australia 93 to 1, and Canada (the next highest) 246 to 1. No matter how you look at it, US practices are way out of step with global practices.
But when you read the annual reports of just about every one of these top companies, regardless of stock performance and dividends, even in obviously underperforming public companies, you will see complex analyses that always justify that exorbitant CEO pay. Compensation committees on these boards (and the compensation experts they rely on) will tell you that competition for top CEOs in the American marketplace is fierce, that they have to pay these numbers to get the best. Oh, and I am the Easter Bunny.
“Any investor who plows through these pay documents will recognize a common corporate theme: The amounts awarded to the chief executive are aligned with shareholders’ interests because the pay is grounded in the company’s performance.
“But companies use a bewildering array of benchmarks in their compensation decisions. These gauges often vary, even within the same industry, making apples-to-apples comparisons difficult and hampering an investor’s ability to determine when an executive is overpaid.
“‘It is amazing how complicated companies make the proxy and how studiously they avoid the simple informative presentation of relative pay for relative performance,’ said Stephen F. O’Byrne, president of Shareholder Value Advisors, a firm specializing in compensation design and performance measurement.
“The most common performance metrics used by companies can be problematic. Total shareholder return, according to a recent study by Equilar, a compensation analysis firm in Redwood City, Calif., is the single most popular measure related to pay at big public companies.
“Companies love total shareholder return in part because it is easy to calculate. But a company’s stock can rocket even when its operations are being run into the ground. So basing pay on total shareholder return can encourage an executive to manage more for a company’s share price than for its overall health.
“‘When you look at total shareholder return relative to pay, you’re not looking at the underlying returns of the business,’ said Mark Van Clieaf, managing director at MVC Associates International, a consulting firm. ‘That can take investors down the wrong path.’” New York Times, June 17th.
But what if you applied a more common-sense metric? How does this CEO pay shine in that light? “A better way to measure whether a C.E.O. has created value at a company is to look at its return on capital over a period of years. This reveals how effectively a company is using its own money to generate profit in its operations… When you compare these returns to an executive’s compensation, you see where pay is justified and where it isn’t.
“[NY Times’ Gretchen Morgenson] asked Mr. O’Byrne and Mr. Van Clieaf to analyze returns on capital among the top 200 companies whose compensation was [recently] reported by The New York Times... The goal was to see how the executive pay at each company stacks up against its corporate performance and highlight which companies are giving away the store to their chief executives and which are getting their money’s worth…
“Among the top 200 companies, the study concluded that 74 overpaid their chief executives in 2015 based on five years of underperformance in return on capital. The total overpayment last year to the C.E.O.s at these companies, the study found, was $835 million.” NY Times. Why would you pay an underperforming CEO under the guise of “that’s what the market for CEO talent bears”? Seems much more like an unholy alliance between boards and management – literally an insider’s club “taking care of its own” and twisting and squirming to justify this horrific reflection of American income inequality (the absolute worst among major economies in the developed world).
We have regulatory and taxation powers to level this playing field, and we have a Congress hell-bent on seeing that never happens, that the playing field continues its tilt toward the incumbent wealthiest segment. We may brag about how we are bringing manufacturing back to the good old USA, but we are silent on the fact that it’s now and automated world where much of the income that used to be paid to workers is going instead to those who own the automation. Not exactly a creator of good jobs, is it? We may talk about GDP success, but that is a number that hardly reflects the economic realities for “most of us” (see my April 19th blog, If Not GDP, What? to see how using that number totally favors that continuing system-tilt to favoring the mega-rich, and my April 26th blog on corporate accounting practices, Lying with Numbers – Advanced Course).
I’m Peter Dekom, and as long as we lie to ourselves in economic measurements and allow insider elites to call the shots, no matter the lip service we pay toward “leveling the playing field,” that income inequality (the worse since the federal government kept these numbers) will just continue to get worse.