Monday, April 03, 2006

Can Shareholders Put an End to Excessive CEO Pay?

The Philadelphia Inquirer has another article on the excessive pay of CEO's and the possibility that shareholders will be able to do something about it. This post will be a nice follow-up to my previous post about the rich getting richer.

First, here are a couple of stats showing that the CEO payscale may in fact be a little off, you decide:
  • One study found that CEO pay has grown to 300 times the average worker's pay from 40 times in the 1970s
  • Another shows that CEO pay grew more than 50 percent between 2002 and 2004
The article makes some great points about the broken payscale that you should think about:
  • Does it seem correct to think that CEO's jobs are 50% harder now than they were a few years ago?
  • Seven times harder than it was 30 years ago?
  • Are CEO's just that much better today than they were then?
  • Maybe there just aren't enough CEO's to go around, thus they need to be paid more because the supply is so small.
  • Perhaps the supply of CEO's is restricted to mainly men (not even really perhaps, only 7 of the Fortune 500 CEO's are women), thus artificially limiting the supply of candidates.
  • Are CEO job searches kept within the "Old Boys Club," again limiting the number of candidates?
This certainly doesn't sound like an efficient marketplace to me. What can be done about it though?

Hopefully, shareholders will start to have some say soon. The first step will be for the SEC to pass a proposal that will force companies to fully disclose what they are paying their executives. Then we as shareholders in a company can judge if this is in-line with other executives.
The next step will be for more companies to start asking shareholders whether or not executive pay should be put to an advisory vote by the shareholders.
The third step will be for more companies to offer shareholders a chance to decide whether director candidates should have to receive majority votes to be seated, instead of the plurality that's common now.

Some companies are starting to do the second and third steps already, but they really all should be doing this. Maybe if these practices become more widely accepted, we can work to get CEO salaries a little more in line with what is going on in the rest of the workforce.
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