Los Angeles Business Journal

Nothing Wrong with CEOs Making Top Dollar

Executive pay grows in step with companies' values

From iconic movie villains like Gordon Gekko to real-life bad guys like Ken Lay, Americans have had it with corporate scoundrels. To many, corporate big-shots are greedy, bloodless, and showered with undeserved wealth. Americans are typically offended by stereotypes, and yet they're quite willing to accept a broad-brush view of corporative executives.

Sometimes it's easy to see why. Between 1980 and 2003, compensation packages for CEOs in the top 500 companies shot up by a factor of about six. Even if there's nothing fraudulent going on, that's the kind of figure that irks many of us.

And why not? It's well known that CEOs often enjoy cozy relationships with board members. Boards may rubber-stamp salary hikes and other goodies, even as company stocks tumble. Americans rightfully cry foul when pay isn't tied to performance, but sometimes they cry foul even when a big pay day is earned.

In 1992 Disney CEO Michael Eisner became the face of corporate gluttony when he exercised options valued at $127 million. President Clinton paid attention to the outrage that followed. He made CEO pay a campaign issue, and pushed for new regulations that included more stringent compensation disclosure.

Many fumed over Eisner's giant payday, yet few bothered to remember that he resuscitated Disney during the 80s and presided over a tenfold increase in share price. Harvey Golub emphasizes the same point. During the eight years he headed American Express, Golub made roughly $172 million. That figure might make most of us weak-kneed, but Golub points out that the company's value grew by $55 billion during his tenure. His seemingly obscene compensation represented less than one-half of one percent of the wealth he helped create.

Self-appointed corporate watchdogs get plenty of ink pointing out that CEOs earn vastly more than most everyone else, but they rarely make the uncomfortable point that relatively few people posses the experience, talent, and drive to lead a company of thousands. If people were interchangeable, if anyone could thrive as a corporate boss, then CEO salaries would plummet.

The CEO club is about as elite as it gets, and yet corporate America is more democratic than its jet-set image conveys. Today 57 million American households—roughly half—own stock, up from just 16 million in 1983. So when companies grow, many regular American families are enriched too.

Yes corporate excesses occur, but they're typically self-correcting. A poorly managed company may chug along for a while, but the market will eventually expose its weaknesses. When performance suffers, stockholders clamor for change. Indeed a recent Wall Street Journal Online/Harris Interactive poll revealed that poor corporate governance has prompted 64 percent of respondents to reduce or divest their holdings in a company. Sometimes corporate excess is reigned in by corporate raiders, real-life Gordon Gekkos who are ironically regarded as the very embodiment of white-collar excess. We shouldn't assume that executive compensation is fixed on an upward trajectory. Indeed a University of Chicago economist calculates that average CEO compensation for S&P 500 firms peaked in 2000, and has since tumbled by about a third.

While the market tends to correct itself, government intervention is often ineffectual or even counterproductive. For example, Clinton 's disclosure requirements probably helped drive compensation up as CEOs began to act more like pro athletes who use their peer's salaries as leverage during contract negotiations.

With our Enron-obsessed news media, it's easy to get the impression that most CEOs just aren't worth the money. But recently economists from MIT and NYU made a far different discovery. They found that, between 1980 and 2003, the average value of the top 500 companies increased by a factor of six. In other words executive compensation grew about as much as companies' values. Pay reflected performance.

Don't agree? Don't think that's the right way to measure performance? Then don't invest in companies that you think pay their execs too much. CEO pay is based on voluntary arrangements. This simple point is often overlooked during all the thundering about "corporate fat cats."

If a company's shareholders are happy, why should outsiders wail about how many Ferraris the boss owns?

Ted Balaker is a policy analyst at Reason Foundation and co-author of the new book The Road More Traveled (Rowman&Littlefield). An archive of his work is here and Reason's privatization research and commentary is here.

Ted Balaker is Producer





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