Blog Assignment #4

MSMC Blog Assignment #4
Organizational Behavior MGT 505.0-D1 Chapter 7:Ethical Dilemma
Professor Cynthia L. Krom By May Lee
10/7/07

“Are American CEOs Paid Too Much?”

Is high compensation of U.S. executives a problem? If so, does the blame for the problem lie with CEOs or with the shareholders and boards that knowingly allow the practice? Are American CEOs greedy? Are these CEOs acting unethically? What do you think?

High compensation of U.S. executives is absolutely a problem! Studies show that American CEOs make 531 times the pay of their average hourly employees. In contract, British CEOs made 25 times, Canadians 21 times, and Germans only 11 times as much. To top it off, performance plays no role in compensation either. CEOs are rewarded whether the company does well or not (Robbins & Judge 2007).

Too many companies continue to pay the top brass a king's ransom merely for doing decently - or for seriously screwing up. Home Depot’s CEO, Bob Nardelli has been hammered for accepting a pay package valued at $250 million even though his company's stock has declined slightly under his stewardship. Pfizer’s Hank McKinnell, was even more assertive, dismissing critics who point to his $83 million lump-sum pension, his $16 million in total comp last year, and his stock's 42% decline since he took charge in 2001 as proof of pay for nonperformance (Kirkland, 2006). The CEOs seem to be rewarded—in most cases, quite amply—for their bad performance. Disney's Michael Eisner, for example, was paid $38 million above the industry average when for three out of six years the company's performance actually declined in relation to other firms in the entertainment industry (Daines & Nair, 2005). Although when the company does well, the compensation seems disproportionately high as well. In 2005, for example, Exxon Mobil reported $36 billion in profits. Its former chairman, Lee R. Raymond, retired that year with a compensation package totaling almost $400 million, including stock, stock options and long-term compensation. Too much? Not to Exxon's investors, who enjoyed a 223% return over the interval, compared to the average 205% return received by shareholders of other oil companies, a premium of about $16 billion. Raymond took home just 4% of that $16 billion (Reich, 2007)

A number of organizations are moving away from paying people based solely on credentials…and toward using variable-pay programs. Instead of paying a person only for time on the job or seniority, a variable-pay program bases a portion of an employee’s pay on some individual and/or organizational measure of performance. Earnings therefore fluctuate up and down with the measure of performance. Today, more than 70% of U.S. companies have some form of variable-pay plan, up from only about 5% in 1970. It is precisely the fluctuation in variable pay that has made these programs attractive to management. It turns part of an organization’s fixed labor costs into a variable cost, thus reducing expenses when performance declines (Robbins & Judge, 2007). I endorse this wholeheartedly.

The economic explanation for sky-high CEO pay does not justify it socially or morally. It only means that investors think CEOs are worth it. As citizens, though, most of us disapprove. About 80% of Americans polled by the Los Angeles Times and Bloomberg in early 2006 said CEOs are overpaid. The reaction was roughly the same regardless of the respondent's income or political affiliation. But if America wants to rein in executive pay, the answer isn't more shareholder rights. Just as with the compensation of Hollywood celebrities or private-equity and hedge fund managers, the answer -- for anyone truly concerned -- is a higher marginal tax rate on the super pay of those in super demand (Reich, 2007).
American CEOs are the definition of greed and robber barons. There is no social responsibility or empathy to a person whose take home pay is hundreds fold than that of the average worker. Imposing a 90% “windfall tax” on any CEO making in excess of one million dollars a year will clear up our deficit quickly and efficiently. The definition of windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience above-average profits. Windfall taxes are primarily levied on the companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses. I say extend the windfall tax to individuals who make more than one million dollars a year and use the proceeds to bolster funding for social programs.


References
1 Robbins, S.P., & Judge, T.A. (2007). Organizational Behavior ,Upper Saddle River, NJ : Prentice Hall
2 Kirkland, Ric (July 10, 2006). “The Real CEO Pay Problem,” Fortune Magazine
3 Daines, R., Nair, V.B., Kornhauser, L. (February 2005) “CEO Skill and Excessive Pay: A Breakdown in Corporate Governance?” Stanford Graduate School of Business
4 Reich, R (September 14, 2007). “CEOs Deserve Their Pay,” Wall Street Journal