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The Conference Board Review® Article
How Much Should A CEO Make?
Less, more, the same-experts take on the question of CEO compensation.
By Melissa Master
Melissa Master is assistant managing editor of Across the Board. She wrote "Water: Just Another Commodity?", the July/August cover story.
Dissatisfaction with excessive CEO pay has grown steadily in recent years, and the calls for pay cuts in the corner offices have never been louder than in the wake of the recent corporate scandals. But while everyone from the man on the street to the man in the Oval Office has an opinion on how much is too much, no one seems to be able to say how much is just right. So we went to the experts: CEOs and former CEOs, compensation consultants, attorneys, economists, and frequent commentators on the issue. We also went to a few unexpected sources, such as the leaders of activist groups and researchers for labor organizations.
We knew, however, that if we simply asked how much CEOs should make, no one would give a simple answer like, "$50 million," and leave it at that. In fact, we were pretty sure that no one would be willing to be pinned down to any specific number at all. So we took a different approach: Rather than asking how much CEOs should be paid, we asked how they should be paid. What are the factors to look at when deciding what figure to put on a CEO's paycheck? Who should have input in the decision? What's the best way to handle stock options? Has CEO compensation really gotten out of control?
Our experts rose ably to the task, providing a variety of perspectives and raising issues that we don't often think about in conjunction with CEO pay. And somehow, in the process, a few dollar amounts got named.
Sarah Anderson:
We support the idea that companies that pay their top executive more than 25 times what the lowest-paid worker makes shouldn't be able to deduct the amount above that level from their taxes. We're big supporters of using ratios like that, rather than the million-dollar limit. A lot of people say, "Do you want to put an absolute cap on executive pay?" But we think that using those ratios is a fair way of going about it. Companies can pay their executives any amount they like-the sky's the limit-but we don't think it's fair for them to deduct that amount from their taxes.
The general public has really had its eyes opened to all these corporate scandals, and people are thinking about whether these executives are worth all this money. Last year, we did see one shareholder resolution related to executive pay pass. So it's a good time for us to be promoting strategies that involve the general public, since it's now very sensitized to these issues.
Ms. Anderson is director of the Global Economy project at the Institute for Policy Studies, a progressive think-tank dedicated to a variety of issues.
Peter Chingos:
When I met with the SEC during their deliberations on executive-compensation disclosure reform, the subject of reasonable compensation was discussed at great length, and they concluded that it's not their role to determine how much compensation is appropriate or not appropriate. They felt their role was to determine disclosure in a way that an unsophisticated reader could figure out the numbers. So they require that companies show three years of salary history, bonus history, stock history, and so on. And they decided to let these numbers see the light of day and let the shareholders react. Let the shareholders speak their minds. If the shareholders feel that's egregious and inappropriate, they can speak up and talk to the compensation committee.
I think bringing together the pay levels with the financial performance is a critical tie. Looking at one without the other is incomplete. It's sobering when a compensation committee or a board says, "OK, here's what we're paying our CEO, and here's how we're performing." If they're paying in the upper quartile and performing in the upper quartile, keep doing it. But if they're paying in the upper quartile and performing in the basement somewhere, it's time to fix this.
Mr. Chingos is head of the Mercer Human Resources Consulting Compensation Practice.
Comments? Write a letter to the editor.
Return to the November/December 2002 The Conference Board Review® issue.
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