Fairy Tale CEOs

FAIRY TALE CEOs….The Times of London reports on Warren Buffett’s disgust with executive compensation in America:

He called on investors to rise up and revolt over colossal executive pay packages, saying in the past 20 years there had been ?an enormous disparity in the rates of compensation between people at the top and people at the bottom, and a disconnect between people at the top and the shareowners who give them the money?.

This is something that often gets lost in philosophical discussions of income inequality: it’s not just a matter of tax rates and “winner take all” economies, it’s also a matter of pay packages for corporate CEOs that have become criminally outrageous.

Fortune 500 CEOs are paid upwards of 10x what they were in the 50s and 60s, pay that could only be justified if they were 10x better than those old fogies. But they aren’t. Corporate performance on a wide variety of measures is no better today than it was then, and “star” CEOs rarely justify their lucrative, risk-free pay packages.

So how should CEOs be paid? Aside from “a lot less,” I’m tentatively convinced that stock options should be done away with completely, replaced by qualified stock grants instead. These are simple, easy to value, and reward long term performance instead of short-term spikes.

And how should executive bonuses (both cash and stock grants) be calculated? They should depend on performance, and this should always be calculated in comparison to a basket of similar firms. If revenues go down 5%, but your whole industry is down 10%, you’ve actually done pretty well and should be rewarded. Conversely, if revenues are up 5% but the rest of the industry is up 10%, you’ve probably done poorly and should be compensated accordingly.

The “entrepeneurial” Fortune 500 CEO is a myth of the Wall Street Journal editorial page and should be relegated to the same corner we reserve for all such fairy tales when we grow up. In reality, CEOs hate risk, they hate genuine performance assessments, and they hate being forced to live up to genuine benchmarks.

They should start being forced to work for a living.

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