Do They Need to be Exorbitant?

Time was when CEO salaries were far less than the 300 times entry-level workers they are now, and actually CEOs seemed OK with that.  But then several things happened.

Organizational theorists argued that they needed more skin in the game to be motivated.  If all the reward for their hard work went to the owners, how could they keep engaged?  They suggested that stock options and bonuses would allow them to benefit more directly from their management success.

Subsequently, CEOs became competitive with each other.  Fueled by the myth of the “corporate savior,” i.e. the idea that the success of a company depended primarily on its CEO, they demanded higher and higher levels of compensation and perks.  Corporate boards, buying into the myth, were all too willing to give what they demanded.

But the habit did not catch on in Japan.  According to Businessweek: “Companies listed on Japan’s stock exchanges paid their chief executives an average of $580,000 in salary and other compensation last fiscal year . . .  about 16 times more than the typical Japanese worker. Average CEO pay at the 3,000 largest U.S. companies is $3.5 million, including stock options and bonuses.  (See, “In Japan, Underpaid – and Loving It.”)

There are reasons for this, of course, mainly having to do with the fact that Japanese executives tend to stay put.  Loyal to their companies, they don’t jockey for new assignments and jobs.  But their experience does suggest that the thinking that spurred the huge increase in CEO salaries in the U.S. was flawed.  CEOs do not need the salaries they have become accustomed to receiving in order to be motivated or committed.  In fact, it could be argued that it has made them more independent and greedy.

Now, of course, it’s too late.  Not only has it become established custom, but also we have created a new class of corporate and financial managers who believe they actually own the system.  They feel entitled to skim off the profits at the top for their own benefit, and they have persuaded many of us that this is the way the system has to work.

But if we think about the Japanese CEOs or even remember our own corporate history, we might conceive of pushing back.  Limits can be set, taxes can be raised, and a new public awareness can mitigate this massive redistribution of wealth.

What we don’t know we know about access to ownership is that we are all owners – majority owners, by far – of our public corporations.  Though our pension funds, individual retirement accounts, college saving funds, etc., we hold the majority of shareholder votes.  But we seldom think to exercise that power or seek ways to exercise it.