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September 27, 2010 5:57 PM Age: 11 yrs

CEO Pay – Is it Over the Top? What’s the Effect on Worker Morale? The Debate About Exec Compensation Continues – “Ratios” of CEO-Worker Pay Coming

Category: Hank Boerner Articles
Source:  By Hank Boerner - Featured commentator, Accountability Central.com

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Is top pay seen as being over the top by a growing number of Americans who are not beneficiaries of a top management compensation system?  Maybe yes, maybe “not yet.”

STAY TUNED…to the growing number of commentators that have been weighing in on the effects of corporate CEOs appearing to gorge themselves at the workers’ and investors’ expense.  The debate gets very heated when CEOs thought to be overpaid are presiding over under-performing companies.  But deciphering actual CEO compensation can be a daunting task – even for financial analysts.  There are many complexities to exec compensation – same as when we were trying to unravel the complexities created by Wall Street’s Masters of the Universe when collateralized debt obligations (CDOs) were conjured up for investors.

The recent mandate from SEC requiring corporations to present an annual Compensation & Disclosure Analysis (CD&A) in recent years has led to much more disclosure on top gun pay schemes and activist investors have thoroughly vetted the documents.  (We remember receiving the first such report from a Fortune 50 company. Of the almost 100 pages in the 10-k, more than ¾ were devoted to the subject of exec comp – much more information than the nuts & bolts of the business of keen interest to investors.  But you could tell where management and the legal team the emphasis should be.)

Recall the discussions during the Cold War about the so-called “neutron bomb?”  The projected impact of the mighty weapon was supposed to leave structures standing and only wipe out the military forces (humans) of the enemy.  No building flattened was the designers’ promise. The current state of the economic recovery is like that for many people.  We’re seeing a Neutron Recovery.  Companies may be doing better -- but an estimated 27+ millions of Americans are unemployed, under-employed, working part time or perhaps have just given up on ever finding work.  The nation’s poverty ranks are said to be 45 million persons or more. The government stats show the people on unemployment insurance – not the ranks of under-employed, etc.  It’s the neutron effect in industry – the people are gone, but the industry structures are still standing, thank you. At least for now.

Back to the question of CEO and C-suite pay packages – many company leaders have not personally felt the effects of the financial and economic debacle in their pay stubs (as their employees have). Company workers have been bearing the brunt of the current downturn. 

STAY TUNED to…the effects of the shrinking middle class.  The Neutron Recovery is the latest in a string of hits on the American rank & file.  Good-paying jobs have been steadily eliminated over the past decade; jobs have been sent overseas by the tens of millions (thanks to globalization) by US companies, and productivity has been steadily climbing as worker output increases and wages decrease or at least stagnate (real wages have been stagnating since the late-1970s).  All through the last three or four administrations – Republican and Democrat – there was a steady drip of news reports of company downsizings, layoff, buyouts, moves – affecting the work guy or gal. 

But pay at the top has not similarly fallen.  In the September 13th issue of Newsweek author Rana Foroohar explores the topic in her article – “Stuffing Their Pockets; For CEOs [it has been] a lucrative recession.”  Foroohar points out that the average S&P 500 CEO pays averages 263 times that of the lowest paid worker.  And while this is somewhat below the 2007 peak, this is an issue now coming into clearer focus for middle class Americans.  Especially as the full effects of the layoffs is being felt in hometowns across the nation.



STAY TUNED to
…a possible trigger for broadening the public debate on executive compensation and the conditions for rank & file.  The recently-passed Dodd-Frank legislation mandates corporate disclosure of the ratio (highest to lowest paid employees) – will these new disclosures trigger discontent among workers and voters? So far, the issue of CEO pay has made for interesting headlines now and then -- but not a sustained public dialogue on what’s happening in CEO compensation, especially among certain corporate laggards.  Newsweek’s Foroohar points out that the CEOs of the 50 largest companies where workers were cut were able to take home 42 percent more pay in 2009 than their peers.

When does this become a topic of conversation for the American public?  When the Neutron Recovery continues, without the private sector creating jobs?  As real wages continue to decline for American workers?  As more jobs are outsourced to foreign lands? 

STAY TUNED to…public sector reaction if public pressure on members of the Congress and the Obama Administration does cause rising anger and backlash -- this could result in tax law changes (re corporate compensation and income streams other than worker wages).  During WW II, there was a spirit of universal sharing of the burden of a nation at war; the top earners ultimately saw tax rates as high as 90 percent of their income to prevent wartime profiteering.  No one at home should grow rich, it was said, while young men and women were sacrificing to defend the nation, some paying the ultimate price. 

Do read the Newsweek article – this is another of in-depth media examinations of the ratio of executive-to-average-worker pay.   There’ll probably be many more to come once the corporate disclosures of ratios begins – think of the hundreds of companies that will be disclosing ratios.  The disclosure may bring a focus on the now still small dialogue on the question of whether some top pay is certainly over the top in the eyes of the average worker (voter).  This may become acute in the American Neutron Recovery cities – where corporate structures still stand -- but the people have vanished from the workplace. 

As author Rana Foroohar points out, the “the larger issue of growing inequity in the Western world is a tough one to tackle; the forces of globalization that have led to stagnating wages aren’t going to disappear…”  But the dialogue on corporate pay ratios may trigger a much broader public discussion about the negative impacts of overpaying some underperforming top guns.

 

STAY TUNED to…an extension of this story line about CEO pay.  Focusing on the CEO pay issue also brings into the question, to whom is the CEO accountable?  To the board of directors, yes, in theory.  Who is the board accountable to?  To the shareholder who votes them in.  In theory.  Since the shareholder is becoming more and more a “universal owner” (say, a labor or public employee pension fund), the question arises:  to whom ultimately is the CEO – Board  accountable? 

Existing governance theories may be stood on their head when CEO pay issues are more in public focus… the Neutron Recovery drags on for millions of Americans out of work, underemployed and those who’ve given up on looking for work. 

The ingredients or seeds for class warfare may be found in the headlines about CEO-worker pay ratios just over the horizon. Stay Tuned.

###

Hank Boerner is a long-time observer of the American Corporate scene and social trends. He’s chairman of the Governance & Accountability Institute, publishers of Accountability-Central.  Email: hboerner@accountability-central.com



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