American CEOs are Overpaid!

Philip Kotler

I would argue that runaway CEO salaries are harming our middle class and dampening the economy without offering a corresponding benefit.

I remember hearing that JP Morgan decided to raise CEO Jamie Dimon’s pay by 35 percent! He would take home a pay of $27 million in 2015!

The JPMorgan directors must think that Jamie Dimon is singularly responsible for the rise in JP Morgan’s revenue and profits in 2015. The directors admit that a few other executives have helped. They raised the payout I of their two operating officers and their asset manager by several million. The high pay of the CEO justifies high pay o the other top executives.

How long is outlandish American corporate pay going to continue?

Here are some other CEO payouts:

• The CEO of Discovery Communications was paid $156,000,000 or 1,951 times the median worker pay of $80,000.

• The CEO of Chipotle was paid $28,900,000 or 1,522 times the median worker pay of $19,000.

• The CEO of CVS was paid $32,400,000 or 1,192 times the median worker pay of $27,139.

• The CEO of Walmart was paid $25,600,000 or 1,133 times the median worker pay of $22,591.

• The CEO of McDonald’s was paid $7,290,000 or 644 times the median worker pay of $11,324.

All this raises a key question: are American CEOs overpaid or are American workers underpaid?

The average Fortune 500 CEO takes home $17 million a year. Would the company be smarter to say to their CEO: “Take $10 million. Let’s distribute the $7 million by giving $1,000 to each of our 7,000 employees. That would make 7,000 of our employees happier and probably result in higher productivity.”

I failed to mention Jamie Dimon’s retirement package? He has a few more years before retiring. Technically he doesn’t need a retirement package because he has earned so much from JP Morgan over the years. Yet he will get a huge retirement package. When CEO James Mulva of Conoco Phillips retired, his package included $70 million in retirement benefits and $44 million in deferred compensation. We can feel a little better by learning that when McDonald’s CEO James Skinner retired, he only received $10 million in retirement benefits and $38 million in deferred compensation.

If anyone says that we are not creating a New Royal Class in America, his head is in the sand. Maybe he doesn’t care that 15% of our people live in poverty, homelessness is rampant in big cities, children don’t get enough to eat, and so many Walmart workers need food stamps in addition to their pay to make it through the week.

What Do Other Countries Pay Their Top Executives?

The median compensation of major Asian CEOs is $1.3 million, not $17 million. Of this, 63% is base salary and 37% is incentive pay. One wonders how U.S. companies can afford to pay its CEOs 16 times more and still be profitable.

The median compensation of European and Australian CEOs is $6.2 million, not $17 million. Of this, 31% is base salary, 33% is annual bonus, and 36% is long term incentives.

Returning to the composition of U.S. CEO pay, only 9% is base salary, 16% is annual bonus, and 75% is long-term incentives.

Clearly, American CEOs are paid a great deal more than CEOs in other countries. Furthermore, their pay consists of much more incentive pay. CEO pay is set by the Management Boards of these American companies. The Board sets CEO pay each year based on past performance and corporate financial goals for the coming year or years. Boards typically set performance goals for revenue and profit. If a CEO exceeds revenue and profits goals, the payout is higher. If a CEO falls short of revenue and profit goals, the payout is lower. The Board pre-sets payout levels based on how much of the target performance is achieved.

The Board makes other determinations, such as how much payout is in cash versus equity. Base salary and bonus is often in cash but long-term incentive is often in company stock or stock options. The Board hopes that the CEO gets heavily invested in company stock so that he is more inclined to build up company long term value.

Finding a New CEO

When a company announces that its CEO will retire, the Board organizes a search for a new CEO. The company has two choices. It can promote an insider to CEO? Or it can go into the market and find a new CEO?

Very often, the right successor is already in the company, working in finance or heading one of the company’s divisions. When CEO Jack Welch announced his retirement from GE, GE started to evaluate three top executives working for GE: All three had splendid backgrounds. GE chose Jeff Immelt to succeed Jack Welch. GE knew that it would lose its other two executive candidates to other companies. James McNerney was recruited to be CEO of Boeing. Robert Nardelli became CEO of Home Depot. Surprisingly, neither man did well in their new jobs. And Jeff Immelt’s long-held CEO position failed to bring GE back to life.

Some companies prefer to recruit an outsider who could bring fresh views and skills to the company. The company appoints a recruitment committee that interviews several top executive search firms — such as Korn Ferry, Heidrick & Struggles, Spencer Stuart — and hires one to do the search. Several candidates are identified and interviewed. The company will favor one of them. The issue becomes what compensation plan to offer the chosen candidate.

The answer is to find what companies are paying to comparable executives. This pay package would essentially be the market price for that level of talent. The executive recruiting firm will normally press the company to offer more than this amount to insure getting a “yes” from this candidate. This explains why top executive pay keeps rising, now at $17 million in the U.S. for a top CEO.

Can Anything Be Done to Slow Down Overly Large Executive Pay Packages?

Here are three ways to oppose the excessive pay of CEOs and top managers.

Publicize to the public the excessively high pay to CEOs. If American unions were strong, these unions would publically complain about the excessive pay to CEOs. In pleading for higher worker wages, they would expose the high pay to company executives. The best way to dramatize the excess is by publicizing the ‘s pay as a ratio to the median worker’s pay. An American CEO in a Fortune 500 company takes home $17 million a year and the median American worker takes home $50,000 a year. This means that the CEO gets 340 times the median worker’s pay ($17million/$50,000). Let’s remember that in the old days, the CEO got 20 times the median pay of the worker. I remember when the ratio went up to 100 times. How did it get to be 340 times?

Out of concern, the Securities and Exchange Commission announced in 2017 that large companies should publish its CEO pay ratio to the median worker in each company. Many companies objected, arguing that the two numbers — CEO pay and median worker pay — are difficult and costly to estimate. They say that a CEO’s pay includes salary, bonuses, stock options, restricted stock grants, and long-term incentive payouts, resulting in a different payout each year. They also argued that the median workers’ pay in a multinational corporation differs in different countries and the resulting median number is almost meaningless.

Clearly, companies don’t want the public to know that their CEO gets 340 times the median worker pay. This creates bad publicity for the company and for capitalism itself. It could make combatants out of their employees, consumers, investor groups and even state governments. Consumers might stop buying brands of companies who overpay their CEOs. Company employees might be demotivated in learning how much their hard labor pays to support the luxuries and golf games of their CEO.

Get Management Boards to Reconsider What is Fair Pay for the CEO. Government and the public could pressure Boards to think more carefully how to find highly capable executives willing to work at half the current pay level. The Boards should instruct the executive search agency to find the finest executive they could get for $10 million, not $17 million a year. Perhaps the Board should recruit the best executive from Asia or Australia who doesn’t come expecting the American pay level.

Raise the U.S. Top Bracket Income Tax Rate. Conservatives in the U.S. have constantly pushed down the maximum income tax rate that at one time stood at 90%, then 70%, and now stands at 37%. Their argument was (1) that lower income taxes would lead to higher economic growth and (2) that higher economic growth would “trickle down” to the working class. This myth is now exposed by the evidence that working class pay has not improved in real terms while the rich keep getting richer each year. American style Capitalism has only worked to make the rich richer.

Let’s add more income tax brackets to our tax system. My proposal is that for salaries higher than $200,000, we establish the following brackets:

Brackets Top bracket tax rate

$200,000-$500,000, 40%

$500,000-$1,000,000, 42%

$1,000,000-$5,000,000 44%

$5,000,000-$10,000,000 46%

Over $10,000,000 50%

The truth is that the workers disbenefit rather than benefit from high executive pay. The economy gets weaker. Why? Because workers are not paid enough to buy all the output made possible by Capitalism. The poor are too poor to buy much. Low income earners have to borrow to pay their rent because they aren’t getting a living wage. The middle class is getting smaller and find it hard to pay high medical bills and pay for their kid’s college education.

Do you agree that top executive pay in the U.S. is excessive? If so, let’s say that it is time to reform American Capitalism to work for the Common Good.