CEOs Most Tainted Of All Assets
By John D. Hoge
03/15/09

President Obama, on January 29, 2009, tacitly recognized that we, as a society can reduce CEO’s bloated compensation, when he chided Wall Street executives for awarding themselves over 18 billion dollars worth of bonuses this year (2008) while many of their corporations were receiving taxpayer bailout funds.

We’ve heard a lot recently about tainted assets. The term tainted conjures up images of contaminated food and polluted water, but also applies to anything that is reduced in quality.

In our present economic crisis, the term “tainted assets” is usually understood to refer to the greatly diminished value of millions of home mortgages, although it can also properly apply to any asset whose present value has been determined to be much lower than prior assessments.

Although the press has said little about this, to my mind, the Granddaddies of all overvalued assets are America’s multimillion-dollar CEOs—whose mismanagement, corrupt, and sometimes simply illegal business practices have literally and substantially caused our nation’s economic meltdown. Their infamous and widely reviled “compensation packages” have never had a basis in any form of productive reality and their obscenely excessive pay should no longer be tolerated by our nation.

Executives of publicly-traded corporations should be compensated according to some rational measure of their value based on the success of their company. Their pay should never be more than 10 times the average combined salaries of their corporation’s employees, and, when their performance takes a corporation to its knees, they should receive nothing other than a bum’s rush to the door. They have no right to expect exorbitant bonuses or any form of golden-parachute.

Obscenely excessive executive compensation is a very real moral hazard with toxic consequences to the lifeblood of our democracy. Hard working Americans will never feel good about their meager earth-bound salaries as long as they must be compared with the astronomically unreal compensation packages of many of our nation’s CEOs. The nearly $70 million dollar Christmas bonus given to the CEO Lloyd Blankfein of Goldman Sachs in 2007 is just one example of this problem. Anyone with an Internet connection can verify this 70 million dollar figure and find countless other examples of CEOs who got multi-million dollar bonuses, some of which were even paid this year after Congress began writing checks from its corporate bail-out fund.

Fifty years ago America’s CEOs were not so exorbitantly compensated, and even today, other nations’ corporate kings typically make much less than ours. For example, Frydman and Saks’ 2007 paper showed that the real value of CEO compensation in the USA has risen from just over 20 times their average workers’ salaries in 1970 to over 110 times that average today. Foreign nations’ CEOs earn on average 2/3rds less than our kings of commerce (Burton & Weller, 2005). The exorbitant compensation of our CEOs is, in fact, a danger to our representative democracy because their excessive wealth unjustifiably influences--and sometimes corrupts--our politicians. “Big money” has often attempted to influence politics and government. Wealthy people’s inflated influence means the voices of average American citizens may only be heard at the ballot box—the last bastion of true democracy.

Let’s be clear: wealth is good and we should hope that all Americans manage to significantly increase their personal wealth through honest and hard work. If you own your own company you can pay yourself whatever you want--or whatever your business will bear. If you are fortunate enough to be a sports star or popular musician, more power to you if you can attract crowds to the stadium or sell millions of your recordings. However, if you are, in reality, merely managing a business owned by others (i.e., stockholders), your pay should be linked to concrete measures of productivity and merit. It should not be set by some “sweetheart” governing board of cronies that meets just once or twice a year and sometimes doesn’t even know what they are paying (as was the case with Dick Grasso’s $139 million dollar compensation package in his last year as CEO of the New York Stock Exchange).

The United States of America was founded on a Bill of Rights and a Constitution that fully recognized the dangers of allowing the development of Royalty. The Founders knew from personal experience that Royalty should have no place in our society. Yet today, many of our politicians have become little more than servants of our super-wealthy CEOs. History shows us that we do not have to accept this present, noxious reality.

In his classic and widely-read book, The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (7th edition, 1999) Robert L. Heilbroner has this to say about John Stuart Mill’s thoughts on the distribution of wealth. “The distribution of wealth, therefore, depends on the laws and customs of society…. If society did not like the ‘natural’ results of its activities, it had only to change them. Society could tax and subsidize, it could expropriate and redistribute. It could give all its wealth to a king, or it could run a gigantic charity ward; it could give due heed to incentives, or it could--at its own risk--ignore them. But whatever it did, there was no ‘correct’ distribution--at least none that economics had any claim to fathom. There was no appeal to ‘laws’ to justify how society shared its fruits: there were only men sharing their wealth as they saw fit” (p. 129).

Heilbroner and Mill are telling us that the distribution of wealth has nothing to do with the laws of economics. In short, we, as a society, can decide to pay teachers and police officers more while simultaneously reducing the compensation of CEOs. There is no economic law determining what CEOs or teachers or police officers are to be paid. We simply decide, and that’s how things are until we decide to change them. President Obama, on January 29, 2009, tacitly recognized that we, as a society can reduce CEO’s bloated compensation, when he chided Wall Street executives for awarding themselves over 18 billion dollars worth of bonuses this year (2008) while many of their corporations were receiving taxpayer bailout funds. Fully grasping the reality that we, the American people, decide the value of each profession’s services also helps us understand why corporate shareholders should vote on CEO pay packages.

This essay has argued that skyrocketing CEO pay is not only arbitrary, but also damaging to the fabric of our society. Surely the time has come for Americans to renew their union with real democracy. We must retake control of our politicians in order to have a government that is honestly working for us, the people. Eliminating the excessive and unwarranted compensation of America’s CEOs is a necessary first step toward achieving this objective.

It should be a sobering thought to consider that a single CEO of a major corporation earns as much in a year as 75,000 average Joe's. I hear a lot of talking heads on the financial news networks stating that these expenditures are necessary and justified to obtain the best people. It is the free market system in operation.

I question just how free the market really is. If you or I contract to do business with the government you will likely go through the open bid process in which all proposals are read allowed and the lowest qualified bidder receives the contract.

I will believe in the integrity of the "free market system" when I see chief executive officers held to that same standard.