Monday, April 25, 2011

Are CEOs Paid Too Much?

That's a simple question that I ask: "Are CEOs paid too much?" Or is it? I would bet that most people who read this have a fairly immediate answer, but unlike everyone having an immediate and hopefully unanimous answer to the question "Is the Earth flat?", in this case, I would not expect unanimity.

Last Thursday, CNN had an online article on the topic. Their headline stated that CEOs earn 343 times as much as typical workers. Later on, we learn that they are citing statistics from an AFL-CIO website.. Does the fact that these are AFL-CIO compiled statistics make this comparison incorrect? No! To the contrary, does that fact make the comparison correct? No!

The article tells us that the typical US worker for all occupations earned $33,190 for all occupations in 2009. This, they say, is according to data compiled by the Bureau of Labor Statistics (BLS). The comparison was made to the 2010 pay of Fortune 500 CEOs. The CEO compensation is proxy compensation which means that it includes the increase in value in pensions and deferred compensation. The BLS data does not.

Richard Trumka is President of AFL-CIO. His salary is roughly four times that of the 'typical' worker. He says that he will be happy when average CEO pay is at four times that of the typical worker.

I think that Fortune 500 CEOs make a lot of money. Some of them make more than they deserve, in my opinion. Most that I know of work more than twice as many hours every week as the 'typical' worker. In fact, I don't even know if the typical worker, according to this data, is a full-time employee anywhere.

In any event, this is another example of the media (and they all do it) taking a story that has an air of sensationalism to it and making headlines. This is just wrong. At least the AFL-CIO paywatch website breaks down the compensation of the executives. Here is an excerpt from the AFL-CIO site.

2010 Average CEO Pay at S&P 500 Companies  
Stock Awards$3,833,052
Option Awards$2,384,871
Nonequity Incentive Plan Compensation$2,397,152
Pension and Deferred Compensation Earnings$1,182,057
All Other Compensation$215,911

I expect that data for the typical worker does not include all of these elements. For example, my observations lead me to conclude that most AFL-CIO workers have pensions, but they are probably not included in the compensation for a 'typical' worker. At some companies, at times, they have received equity awards. These are not included in their compensation.

Maybe you think that $11.4 million is too much compensation for the average Fortune 500 CEO (by the way, we don't know if average is mean or median here). Maybe I do as well. But, if someone is actually trying to inform, they will, at the very least, make an apples to apples comparison.

Here is the problem. What this really all goes back to are two things that I have written about in the past: Say-on-Pay and the Dodd-Frank Pay Ratio disclosure. Mr. Trumka has been an outspoken proponent of both, and he is certainly entitled to both his opinions and to his right to voice them. At this point, four companies have received a no vote from their shareholders with regard to Say-on-Pay. Given that only four have gotten that thumbs down, I think those companies deserve to be called out here:

  • Beazer Homes USA
  • Hewlett Packard
  • Jacobs Engineering Group
  • Shuffle Master
Perhaps, ultimately, the message to companies here is to communicate and to explain. Yes, there are things that are required in a proxy disclosure, but there is plenty of room for narrative. If there is a really good reason that executive compensation has increased dramatically, disclose it. If a particular component is going to look bad in print, but there is a perfectly good reason, disclose it.

And, if you can't figure out how to disclose things to make them understandable to your shareholders, you know how to find me.

No comments:

Post a Comment