Excessive CEO Pay

Posted on September 28, 2006 by John Hunter

Overpaid CEOs and Underpaid Managers: Fairness and Executive Compensation by James B. Wade, Charles A. O’Reilly, III and Timothy G. Pollock:

We also find evidence suggesting that CEOs serve as a key referent for employees in determining whether their own situation is “fair,” and this influences their reactions to their own compensation. More specifically, we find that when lower-level managers are underpaid relative to the CEO, that is, underpaid more than the CEO or overpaid less, they are more likely to leave the organization.

Essentially if the CEO is extremely overpaid, even if other executives and managers are overpaid (compared to those outside the company) the others feel they are not being treated fairly and turnover increases. Their data is from the 1980’s and they argue (sensibly to me) that the effects may be larger now. We have all seen CEO pay become much more excessive in the last few decades. That fact, convinced Drucker that the issue of unfair CEO pay demanded very strong denunciation from him over the last decade of his life.

Related: Excessive Executive Pay – More on Obscene CEO Pay – Warren Buffett’s Shareholder Letter – Management Guru Peter Drucker 1909-2005 – Trust: Respect for People – Drucker Opinion Essays from the WSJ – Toyota’s CEO ethical pay:

In a reflection of Toyota’s team-oriented approach, its executive pay is paltry by U.S. standards. Analyst Ron Tadross at Banc of America Securities estimates the total annual compensation of Toyota’s CEO at under $1 million – about as much as a vice president at GM or Ford Motor Co. makes in a good year.

CEO’s that take such unethical large pay today are the robber barons of today and will deserve the judgement of history for the actions they take (I would imagine they are perfectly happy to take the money now and worry about opinions later). And those that approve such pay also deserve sharp criticism.

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