Does Continuing Inflation Justify Higher Levels of Executive Compensation?
I believe the answers to the questions are no and no.
The multimillion-dollar compensation packages currently being paid to the CEOs and other senior executives of large publicly traded companies has become politicized. Is that which I believe to be the obscene $27.0 million paid the CEO of an electric utility holding company, anyone’s business other than the shareholders of the company? If they are offended by the use being made of their money, they can sell the shares held in the company. It’s really none of my business, as I am not a shareholder in the company.
The executives receiving the compensation will likely be required to pay a higher level of personal income taxes than the company would be required to be pay in corporate income taxes for the added amount that was not paid to the executives. Therefore, the taxing authorities and communities gain a bit from the executives’ gain and the company owners’ loss.
Being a pilot, as I used to be, requires, memory, knowledge, judgement, an ability to stay awake, and at times a bit of luck. Pilots are hired to manage a machine to get from a point of departure to a destination. CEOs and other executives are similarly hired by the owners of a business to obtain a positive result. They are not, and should not, in all but the rarest of cases, be thought of as being unique. Business executive management talent is an asset which business owners need, and which is in competitive demand. Therefore, companies must bid, by terms of employment, for the necessary asset. Would a satisfactory CEO have been able to be hired by the electric utility holding company for less than $27.0 million? I certainly believe so, but obviously the Board of Directors, in which I suspect the CEO was a member, didn’t.
The reality is that in the case of larger companies most of the shareholders are likely to be financial institutions and therefore the shepherds of other people’s money. They are not personally impacted by the decisions made by the Boards of companies in which they are invested. Who is watching the watchers? Adding to the conflict of the company officers serving on the Board of Directors of their employer, is the fact that in many cases the CEO is responsible for influencing if not controlling the nomination of Directors, which in most cases, is tantamount to election. It all becomes self-perpetuating and protecting.
Of course, especially in smaller and newer companies, the CEO may also be one of the company’s founders and larger shareholders. Nevertheless, the company owners must hire a well-qualified manager to achieve optimum results, and the entrepreneurial act of founding a company requires different skills than managing one.
Company owners and managers must be aware of the economic realities facing all employees, and employees are important stakeholders in their employer’s company. Clearly, well trained, and motivated employees are an important asset of companies and compensation must accommodate the needs of employees. However, it must be assumed that in the case of CEOs and other senior executives, that their compensation packages at least address reasonable personal needs. Of course, there should be a negotiation, but the achievement of results, not the cost of executive children’s college tuitions, should be the focus. As noted, the market for executive talent is competitive and companies should not believe that there can be employment terms at sub-market levels for extended periods.
The objective of business ownership of a company is the productive employment of capital. If the burden of periodic wage increments, without accompanying productivity increments limits the profitability of a business, capital will depart from the company, and the company will fail.
The effort of employees, at all levels, in a for-profit company, must be on increasing revenues and profit levels. If success is achieved all involved will benefit and if not, the business will pass on.
Arthur Lipper, Chairman arthurlipper@gmail.com
British Far East Holdings Ltd.