WHY CEOs ARE WORTH IT
Enron Corp. and WorldCom Inc. aside, there are few corporate governance issues that resonate as powerfully with the investing public and regulators as executive compensation. So it's not surprising that the Securities and Exchange Commission recently adopted new rules to compel companies–beginning Dec. 15–to provide a compensation discussion and analysis section in annual proxies, designed to make it clear to shareholders just how much they are paying executives.
Although analysts are already predicting that the complexity of options, deferred compensation, pensions and other perks will still make it difficult to come up with an accurate bottom line, a contrarian report from the National Bureau of Economic Analysis argues that maybe no one should even bother trying. According to a working paper by academics Xavier Gabaix and Augustin Landier, the rise in compensation has little to do with lax board governance and everything to do with the growth in U.S. market capitalization. The authors of "Why Are CEOs Paid So Much?" contend that the sixfold increase in CEO pay between 1980 and 2003 is entirely attributable to the sixfold rise in the cumulative value of the nation's public companies. "Given all the passion surrounding the issue of CEO pay, we wanted to analyze it in as cool and dispassionate a way as possible–and not to assume that the reason why CEOs are overpaid is because they stock the board" with cronies, says Gabaix, an associate professor in M.I.T.'s department of economics. "We found, first, that CEO pay moves one-to-one with market capitalization, and second, that the limited pool of good CEOs drives the price higher."
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More importantly, the stakes are enormous. While the difference in talent between the CEOranked No. 1 and one ranked No. 250 may be miniscule, "it's kind of like the talent of Olympic sprinters or concert pianists," says Gabaix. "The best one is only a little better than the next one. But the best gets a lot more money than the runner-up." And for boards who have a responsibility to shareholders, "what does a few million more matter in the scheme of billions?"
FEDERAL PAY IS OUT OF CONTROL
In spite of all the talk from President George W. Bush about restraining government spending, he has presided over a huge jump in pay to the federal civilian workforce. Average salaries for federal employees now outpace private-sector pay by a whopping 93%, finds Chris Edwards, the director of tax policy studies at the Cato Institute. Recent figures from the U.S. Bureau of Economic Analysis on annual compensation for the civilian government workforce show that the average federal worker earned $100,178 in wages and benefits in 2004, as compared to $51,876 for workers in the private sector. Even when generous government benefits are excluded, the average annual wages of federal workers totaled $66,558, 56% more than their private counterparts. The study calls for freezing federal employee wages and revisiting the generous retirement benefits. Long-term, it calls for attrition in the government workforce as Baby Boomer government employees retire.
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