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Why American CEOs Get Paid Way More Than CEOs Anywhere Else (Hint: It's Not Performance Based)

How have we allowed CEOs to make 30 or 40 times the pay of typical workers, and how to make it better.


Top corporate executives have always been well-paid for obvious reasons. Running a major corporation is a demanding job; you would expect to pay a high salary to get and retain talented hardworking people.

But in the last three decades, the pay of CEOs has gone from just being high -- say 30 or 40 times the pay of typical workers -- to being in the stratosphere. The pay of CEOs at major corporations now averages several hundred times the pay of ordinary workers. Annual compensation packages routinely run into the tens of millions of dollars and can run into the hundreds of millions of dollars.

Furthermore, CEOs generally can count on big paychecks in good times and bad. They tend to do well even when their companies do poorly; although they can expect to do better when corporate profits or stock prices rise. This is true even when their actions had little or nothing to do with the increase. For example, the CEOs of the major oil companies got incredibly rich as a result of the run-up in world oil prices in the last decade.

It is also worth noting that the eight- and nine-figure CEO pay stories are primarily an American phenomenon. The CEOs of large successful companies elsewhere, like Samsung, Toyota, and Siemens get by on a fraction of the pay of their less successful counterparts in the United States.

The fact that CEO pay often bears little resemblance to performance and that the upward explosion has not occurred to anywhere near the same extent in other countries, suggests that it is not driven by the natural workings of the market. The origins of the outrageous paychecks at the top can be more likely found in the failing of the corporate governance structure in the United States.

Corporations in Europe and Asia typically have a very different governing structure. They often have large institutional shareholders who actively police the conduct of the top executives, including their compensation.

By contrast, most CEOs in the United States don't have much of a check on their behavior. The corporate boards who are supposed to represent shareholders are more often than not allied with top management. The board members themselves get fat paychecks in the hundreds of thousands of dollars for attending 4-6 meetings a year. They have little reason to seriously scrutinize the pay of top executives.

They are unlikely to ask whether they could get their CEO to deliver a comparable performance for 40-50 percent less money. Nor will they ask whether they can find a comparably qualified CEOs for much less money from Europe, Japan, or China. The questions that top management raise all the time on reducing worker pay to lower costs and increase profits rarely if ever come up in reference to their own pay, even though this is the job of the board.

This matters not only because excessive CEO pay may come at the expense of shareholders or even the health of the company; the outlandish pay packages for top executives helps to set a pay structure in which those in high-level positions in all institutions receive paychecks that are grossly out of line with ordinary workers' pay. Top executives in universities, hospitals, even private charities often draw salaries in the high hundreds of thousands or millions of dollars. This pay is justified by the fact that they could easily get more money running a business of comparable size.

The high pay for those at the top does not come out of the air; it comes from everyone else's paycheck. The share of national income going to the richest 1 percent has risen by more than 10 percentage points over the last three decades. This has roughly the same impact on the living standards of ordinary workers as a doubling of all federal taxes.

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