Tuesday, June 25, 2019

Are CEOs overpaid?

Below is something I submitted to the San Antonio Express-News (it was printed in the paper on June 22 https://www.mysanantonio.com/opinion/commentary/article/Are-CEOs-really-overpaid-14029195.php)

Chris Tomlinson seems to think that CEOs are overpaid because of a rigged system where CEOs sit on corporate boards that determine their pay (“Corporate boards to blame for high CEO pay,” June 17). Yet he never demonstrates that they are, in fact, overpaid.

Here is what George Mason University economics professor says on the issue in his latest book Big Business: A Love Letter to an American Anti-Hero: “CEOs are paid less than the value they bring to their companies. More concretely, CEOs capture only about 68–73 percent of the value they bring to their firms.”

University of Chicago economist Steven Kaplan has found in his research that “CEO pay is largely determined by market forces” and that “CEOs are strongly paid for performance. And boards do monitor CEOs.” This hardly seems sinister.

So, at the very least, the question is in doubt. Businesses that pay too much for any resource they need, be it labor (even the white-collar kind) or capital, will not last long in a competitive economy.
Yes, some CEOs make very large salaries. But claims that they “get paid 500 times more than the median employee” can be misleading.

University of Michigan economist Mark Perry has looked at such studies. For example, they use total compensation, including bonuses and stock options for CEO pay while cash-only pay for part-time rank-and-file workers.

That misses the fringe benefits part of compensation going to workers like health care. Also, there is a difference in hours worked, with CEOs putting in 50-60 hours a week while the average worker is assumed to work 33.7.

CEOs are more likely to be in their prime earning years, too. Workers in their 40s and 50s make more than older and younger workers.

If these issues are taken into account, Perry finds that Fortune 500 CEOs get paid 104 times what the median worker gets paid. That is still a large difference, but only about 20% of what Tomlinson says.

But again, are the CEOs overpaid? It is very easy for outsiders to see the big pay gap and simply conclude it is not fair. But the information to conclude that might not be easily available to journalists and the general public.

If CEO pay is unfair, should we cut it and give more money to workers? How much would that be?
Perry estimates that, for 2017, if we could take all the compensation for the Fortune 500 CEOs and give it to the workers, the average worker would make $66 more a year. This would have little impact on their lives, so the high CEO pay is not harming the workers.

But what if we look at the CEOs of all companies, and not just those of the Fortune 500? Things change even more dramatically.

Perry reports that the average salary for 21,550 Chief Executives in 2014 was $216,100, according to the BLS. That is only 4.4 times the salary of the average worker. That paints a very different picture than what we commonly see.

And guess what? When we look at all CEOs, not just the Fortune 500, there are occupations that get paid more. In 2015, Business Insider reported nine such occupations, all in medicine, with surgeons about 30% above CEOs.

We all want prosperity to be widely and fairly shared. But the way to do that is by teaching people skills that are in demand while having a growing economy. Maligning business and demonizing CEOs is not the way to do it.

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