CEO Compensation

One side effect of the economic meltdown was the creation of the loose Occupy Wall Street movement. This had the interesting effect of getting some attention paid to economic issues, such as income disparity and class issues. This attention revealed that there is significant disparity between (to use the terminology of the occupy movement) the 1% and the 99%.

As I noted in a previous essay, there has been considerable disparity between the income increases of the various classes in the United States. The after-tax income of the top 1% in the United States increased 275% from 1979 to 2007. In contrast,  the top 20% (excluding the top 1%) had a 65% increase in earnings. Those in the bottom 20% also saw an increase, but this was only 18%. As might be imagined, this has created some concern.

The disparity becomes even more extreme if one examines the income of CEOs relative to the workers. One well paid CEO, David Simon, received a pay package worth over $137 million in 2011. The national median salary is $39,312. Doing the math, that means that a person earning the media salary would need to work 3,489 years to earn what Simon received. Someone who is earning the current minimum wage of $7.25 per hour would need to work 9,095 years and 11 months to earn what Simon earned last year. Of course, Simon’s pay is above average, so it would be fairer to compare the median CEO salary with the national median salary.

The median CEO salary as of May, 2012 is $9.587 million per year. A minimum wage worker would only need to work 636 years to earn that much while a person making the national average salary would need a mere 244 to match the one year income of the average CEO. Interestingly, while many workers are facing salary cuts, the average compensation for CEOs increased by 6% from 2011 (and there had been an increase from 2010 to 2011). While there is considerable debate over how to determine the value of a person’s work, accepting that this disparity is just would require accepting that the average CEO is equivalent in productivity to 636 minimum wage workers and to 244 average workers. As anyone who has every worked knows, people do vary in productivity because of skills, talents, motivation and so on. For example, one roofer might put in a roof faster and better than another and thus she would be more productive. It is even easy to imagine one worker being equivalent to many workers in terms of productivity (and this is sometimes demonstrated when people are fired and other people are forced to do these jobs as well as their own original jobs). However it seems unlikely that CEOs are the economic equivalent of superheroes and thus can produce 244 times what an average worker can produce. As such, this would seem to indicate a clear injustice in regards to the pay of those who work for the companies with well paid CEOs.

One obvious reply is that while it would be absurd to claim that one CEO can do the work of 244 average workers, it could be argued that they actually generate value equal to (or greater than) 244 workers. After all, the value of what is produced can vary greatly. To use an obvious example, when I painted houses for money, I was paid much less than I am paid as a professor. However, this is because the service I offer as a professor has more value than that of the services I offered as a painter. In part this is due to the economics of scarcity: almost anyone can work a paintbrush, but few people can teach critical thinking or ethics at the college level. In part the difference is due to the fact that when I painted, the result was just a painted house. When I teach, the result is often a person with a college degree who goes on to get a job (or create them) and contribute to society. As such, by creating more value as a professor, I thus justly earn better pay than I did as a painter. Provided that the value I produce as a professor is proportional to the pay, then the disparity between the pay of Mike the painter and Dr. LaBossiere the professor would be just.

Turning back to the CEOs, if the average CEO is able to produce 244 times the value of the average worker, then the pay disparity would be justified. While this might strike some as unlikely, it does not seem impossible. After all, the writer Suzanne Collins has made vastly more than I ever will as a writer because her book outsell mine to some absurd degree. My books in turn outsell some other authors’ books. However, the disparity does (in general) seem fair. After all, if I could write like Collins and was able to make the right connections, then I could also be a very successful author instead of a low-end scribe. As another example, the author and speaker Sarah Palin vastly out earns me. This is because many people want to buy her books and want to hear her speak. While I do sell a few books, people generally only come to hear me speak because their grades depend on it. And sometimes not even then. As such, the income disparity between myself and Palin could be regarded as just. After all, if I could only write and speak as well as she, then I surely could earn a comparable income.

In the case of the CEOs it could be thus argued that they are like the better authors-what they produce is vastly more valuable than what other workers produce and hence they justly earn their vast incomes. As such, all a defender of disparity would need to do is make a reasonable case that CEOs do generate value proportional to their compensation and that the same is true of the average workers (and minimum wage workers).

Of course, it might be countered that the ability to create such  great value depends on an economic and political system that is rife with injustice. To use an analogy, a skilled thief might “earn” much more than an unskilled thief, however it would be odd to say that the better thief has justly “earned” her wealth. The obvious counter to defend the disparity is to show that the economic and political system is just and, as such, the disparity in compensation is warranted rather than being based on exploiting an unjust system.

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  1. Value is not the same thing as wealth.

    A CEO may produce 2 million times more wealth than you or Socrates or Buddha.

    Does he or she produce more value?

    To decide whether the CEO produces more value we have to discuss what has value, what matters and while money matters, other “things” matter more, to me at least.

  2. Dennis Sceviour

    Utilitarianism defines value as a measure of happiness. However, there are probably a large number of different definitions for value. There are current discussions going on about the theory of value. Specifically, it has been suggested that the public view of economy must shift away from labour and productivity, to ecological and environmental value. James Garvey and Rupert Read have presented this subject in other articles.

    A few overly wealthy people, and many very poor people, with nothing in between, is a recipe for disaster.

  3. michael reidy

    The critical nous involved in bending before political correctness and using ‘she’ as the unmarked plural might be questioned particularly when if sensitivity and inclusiveness demands that the more grammatically correct ‘he’ ought to be avoided there is the option of ‘they’ which is an acceptable usage. If it was good enough for Shakespeare, it’s good enough for me. Thus:
    . For example, one roofer might put in a roof faster and better than another and thus she would be more productive.
    might read:
    For example, one roofer might put in a roof faster and better than another and thus they would be more productive. We are talking about a general multitude of faster roofers.

    About CEOs the proof of the pudding is that they have eaten it all.

  4. Swallerstein,

    That is an excellent and critical point. A CEO might be involved in creating vast profits through overseeing the development of a clever new financial device (perhaps called “microfinancialaccountinversebundling”), yet actually create nothing of value.

    Sorting out the nature of value is rather daunting-but rather important to this matter.

  5. Dennis,

    True-that tends to work out poorly in the long run.

  6. No amount of value/wealth created can morally justify the compensation CEOs of corporations reward themselves – with the exception of the self-made few.

    And I thinks sincere this is an issue of “greed” perhaps the only solution is the teachings of moral philosophy to future CEOs – to help them to develop a culture of fairness and balance – unfortunately, it takes decades to develop such a culture, but you have to start somewhere…

  7. I would say that the most likely avenue of reduced CEO compensation is not via the cries of the 99% but by the impositions of the shareholders. That is, there seems to be some chance that compensation will be linked to CEO performance.

  8. The only possible solution is legislation & or education

  9. If you can persuade shareholders they can expect better/higher returns, they would yield & allow CEOs to pay themselves more – legislation is surely the only practical way.

  10. People with big money and without sense of moral values what we can name them?
    What future they prepare for us and our children?

  11. Yes, CEO can in principle produce 300 times more ‘value’ in the company’s sense. This is because of the fact that companies are concentrations of economic power. A single good decision of the CEO can easily have the effect of 300 workers doing their job well.

  12. That does make sense. One stock defense of the disparity in compensation is based on the internet economy: one person, by the multiplying power of the vast internet market, can generate a vast amount of money. For example, as a professor who has to grade papers, advise students, serve on committees and so on, I cannot handle millions of students and committees. However, as an author who sells books via Amazon and Barnes & Noble I can, in theory, reach millions of people. So, if I happened to write the next Twilight or Hunger Games, I could generate a vast sum of money that would be a considerable multiple of what I make as a mere professor.

  13. Hi Michael, why do you keep saying “she” when you mean “he” or “one”? It detracts completely from what you’re saying and makes me, for one, stop reading the article

  14. I was probably randomizing the gender usage or something.

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