High executive pay hasn’t quite reached that status of a bipartisan “crisis,” but it’s approaching it. The Democratic senator from Virginia, Jim Webb, fulminated against it in his response to President Bush’s State of the Union address.
Bush himself, in a “State of the Economy” speech on Wall Street, urged corporate boards to “step up to their responsibilities” to better manage CEO pay.
Once something officially becomes a crisis, that means it is certain there will be a raft of foolish proposals to address it, and sure enough, legislative measures to crimp corporate pay already are bubbling up.
There are, of course, some abuses in CEO compensation packages, but the broad picture justifies the truism, “You get what you pay for.” Skyrocketing CEO pay has coincided with two decades of wondrous economic performance, during which the value of all stocks traded in the U.S. rose from $1.3 trillion in 1981 to more than $15 trillion in 2000.
The scolds of corporate pay yearn, in effect, for the bad old days of the 1970s. Then, CEOs were paid relatively small amounts, but corporations weren’t particularly innovative and were run with little concern for the interests of shareholders. The hostile-takeover revolution of the 1980s changed all that.
As The Economist magazine puts it, CEOs had been paid like bureaucrats; now they are paid like entrepreneurs. The key innovation was tying compensation to the value of the company’s stock through executive stock-ownership plans. A CEO’s pay, therefore, was directly related to his performance, and his interests brought into alignment with those of shareholders.
It worked, and this model of pay spread throughout the corporate world.
The larger a company is, the greater an incentive that company will have to have the best-possible CEO, since it has more riding on it than a smaller firm. The number of people with the management skills, toughness and imagination suited to running a large corporation is small, and competition for their services is fierce. They are going to be paid a lot of money, especially when a profit or loss of billions of dollars depends on how they perform.
CEOs might be paid extremely well, but they don’t have easy jobs. Their performance is always evaluated by the inescapable taskmaster, the financial markets. When they are found lacking, they are canned — witness Kevin Rollins at Dell, out as CEO after just two and a half years. CEOs last on average about six years in their jobs.
There are always examples of excess. The CEO of Home Depot, Robert Nardelli, stoked outrage when he left the company with a $200 million severance package. His contract was a relic of the bull market of 2000, but it was understandable that Home Depot had desperately wanted a highly regarded former GE executive.
One theory says that corporate boards of publicly traded companies are too cozy with management, so they dole out excessive pay. This happens sometimes. But companies owned by private-equity firms with a direct stake in their success pay similarly large packages to entice and keep hard-charging CEOs. The market knows what it’s doing here. Politicians don’t.
Lowry is editor of the National Review.