Principals, Agents, and Payments

Is CEO pay too high?

Photo: Jonny Linder. Source: Pixabay

In 1977 management guru Peter Drucker suggested that CEOs shouldn’t make more than 25 times the average salary at their companies. He thought that wider gaps bring resentment and falling morale. In 1983 the a CEO made 43 times the median worker’s salary. In 1993, Congress passed an IRS rule that required executive pay above $1 million to be performance-based in order qualify as tax-deductible. The result was that CEO pay grew with the stock market, and the CEOs of S&P 500 companies now make 373 times their employees.

In 2009, the US Congress enacted “Say on Pay” legislation, giving shareholders a non-binding vote on executive compensation. In 2016 shareholders approved of company pay practices 99% of the time. Some critics suggest that performance-based pay encourages short-term financial engineering, but shareholders don’t seem to mind seeing stock price and dividend payments go up.

US companies have changed a lot since the 1980s. Rather than selling primarily to a domestic market, large enterprises face an increasingly global challenge. In fact, almost 50% of the revenues of S&P 500 companies come from non-US sources.

Source: Marketwatch

Global corporations are increasingly multifaceted enterprises—facing diverse tax and regulatory regimes, employment markets, financial challenges, and complex supply-chain issues. It’s no surprise that Tim Cook, Apple’s current CEO, was formerly its Chief Operating Officer. Running world’s biggest companies means having a global reach to find the best workers and the best procedures, in increasingly competitive markets.

In 2017, US companies will be required to disclose the ratio of their CEOs’ pay to that of a median employee. Various measures of “pay for performance” have been debated over the years. It will be interesting to see if these “headline ratios” have any impact beyond the occasional news flash.

Douglas R. Tengdin, CFA

Chief Investment Officer

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