Episode Information

CEO Pay
Where We Live - with John Dankosky
Aired:
08/25/2008
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In this episode:

Mind the gap - the pay gap, that is

 

Episode Audio

52:31 minutes (25.21 MB)
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Despite the tough economy, CEOs at major companies are still making nearly 350 times as much as the average American worker.

Each year, around labor day, the Institute for Policy Studies puts out a report on what they call "executive excess" - the huge gap between employees and top bosses. But the study doesn't just focus on what some might call "greed" - it's also about accountability, and pay for performance.

For instance, the heads of Fannie Mae and Freddie Mac both made significantly more than the average S&P 500 CEO - despite leading their companies straight into the teeth of the mortgage crisis. At General Motors, closing plants, and a product line out of step with consumer tastes got CEO Rick Wagoner a 64 percent raise.

Today, Where We Live - a look at CEO pay, and some analysis of what really is excessive. And, we'd like you to join the conversation - how much is too much?

 


 
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email to [email protected]

I was quite surprised to hear the policy expert who was speaking at approximately 9:30 a.m. this morning (Mon 8/25) make numerous inaccurate and/or misleading statements about CEO pay and IRS regulations. While I agree that certain CEO compensation seems over the top, this should not permit experts to mislead on the subject. It might be a good idea to get someone from the IRS to weigh in on some of the assertions that your speaker made, particularly those relating to deferred compensation, 401Ks, and corporate tax rate.

For example, the speaker stated that CEOs have deferred compensation arrangements without limits as are found in 401K plans with which many people are familiar. This is true but not the whole truth and therefore misleading. It also is the case that CEO deferred comp must be subject to a substantial risk of forfeiture if it is to be deferred. Typically the risk of forfeiture disappears at retirement, often earlier, in which event income taxes on the entire amount deferred is due. People with IRAs and 401Ks do not have to liquidate these deferred accounts (at any time) and thereby trigger income tax on the entire amount. There are other benefits of IRA and 401Ks that are not available to the type of deferred plans (non-qualified) that the speaker was referring to. While it may be a valid point that top CEOs earn too much deferred compensation, the speaker seemed too at ease with communicating half-truths to get audience attention.

The speaker also stated that corporations save taxes the more they pay their CEOs. True statement again, but even more misleading than the assertion about deferred compensation. The maximum corporate tax rate is 35% and kicks in at about $18 million of taxable income. If a corporation pays a dollar more of compensation (or any expense) then it reduces tax, at the top corporate tax rate, by $.35. HOWEVER, the corporation (and its shareholders) still have seen a reduction in cash of $.65. Paying more compensation may reduce taxes otherwise to be paid but it certainly costs a corporation more to pay incremental compensation even with the tax “savings”. The speaker’s comments conveyed the message that corporations somehow come out “ahead” if they pay more compensation to CEOs, and this is not true. There may be a saving in tax, but there still is the cost of the compensation.

It does not serve the public well to have experts mislead the public, particularly when the methods employed seem calculated to flame emotions.

TC

email to [email protected]

I know the show is over, but two things I want to say anyway:

1. People throw the phrase "pay for performance" around as though it
were self-evident. What performance? How much is it worth? To whom?
Over what time period? Part of what has led "corporate America" so far
off track is that, as one of your guests noted in passing, CEO's are
paid for operational performance -- and much of the compensation for
CEOs of publicly traded companies is linked to the stock price. If your
compensation is linked to your stock price, it tends to give you a very
short-term (quarterly, even) focus -- which means long term strategic
thinking often gets lost.

2. IF (and it's a big "if") we buy the notion that our bosses should be
paid roughly 2.5 times as much as we are for doing significantly
different work (not all that common an occurrence, in my experience)
then seven layers of management yields a multiple for the person at the
top of the seven layers of 244 times the pay of the worker at the bottom
-- who, of course, may or may not be receiving the pay of the "average
worker," but it probably makes more sense to use within-company or
within-industry metrics to assess the "equity" of the chief executive's
pay.

Another note (from an ex-GE-er): High-level GE executives who are
recruited into other companies often have "crashed and burned" in their
new assignment, in part because they typically do not know the industry
to which they have gone, and it really does matter (for the long haul,
more than for the short-term share price) whether a person has a deep
grasp of the business they are trying to lead. Also, GE guys are used
to a certain level of supportive infrastructure that simply does not
exist at many other companies, and it turns out the old Chinese proverb,
"every hero needs three to help," contains a good deal of deep wisdom.

I often listen to your show on my commute in to work, and enjoy many of
them very much. I appreciate the wide range of topics that you tackle,
and have especially appreciated your delving into Connecticut politics
-- it has helped me develop my understanding of many local issues. I
especially enjoy your conversations with Bill Curry, whom I consider a
Connecticut treasure.

Many thanks,

Mary Lou Phillips