CEO Pay and the Ugly New Reality
Aug 5th 2011 3:47PM
Updated Aug 5th 2011 3:48PM
As this past week's stock market bloodbath this past week has proved, our economy never really healed from the financial crisis. Many Americans are still suffering, with more painful times left to come. But one class of Americans hasn't been hurting in tandem with everybody else: chief executive officers.
"Above average" folks
The wide discrepancy between CEO pay and average workers' salaries in the United States has been well-publicized for years. When plenty of Americans felt flush with opportunities, that discrepancy probably didn't seem so galling. In today's unhealthy economy, though, astronomical paychecks for corporate bosses add insult to injury.
Reuters recently compared the CEO-to-worker pay ratios in several countries. According to its figures, the average U.S. CEO rakes in 142 times the wage of the average worker. In Britain, corporate heads only make 69 times that of workers, and Sweden's chief executives make just 34 times that of average employees.
According to International Shareholder Services, median pay for CEOs in the S&P 500 increased 33% last year alone. Meanwhile, according to a study by The Hamilton Project, median wages for two-parent families have increased 23% since 1975. Most of that salary increase owes to increasing female participation in the workforce.
According to the U.S. News & World Report in which I found that data, American workers' earnings have decreased over the last couple of decades when adjusted for inflation. That's obviously not the case for CEOs.
Chief executive... or chief executioner?
Why are we paying chief executives the big bucks now? Mass layoffs are once again commanding headlines -- and these measures aren't always productive strategies. Let's take a look at a few recent examples.
BlackBerry maker Research In Motion (NAS: RIMM) recently announced plans to lay off 2,000 workers, or 10% of its total workforce. How much intellectual capital these pink slips represent is anyone's guess. Will slimming down help it face the formidable competitive challenges in the smartphone market from Apple (NAS: AAPL) and Google (NAS: GOOG) ? My guess is "no." (Co-CEO compensation in fiscal 2011: $5.1 million apiece for James Balsillie and Mike Lazaridis.)
Aerospace and defense contractor Lockheed Martin (NYS: LMT) is offering a voluntary layoff program to a whopping 6,500 employees. But what can you expect from the world's largest defense contractor when the government's in cost-saving mode? (Total CEO compensation in 2010: $21.9 million.)
HSBC Holdings (NYS: HBC) , the largest European bank, said it's cutting a staggering 30,000 employees (or 10% of its workforce) over the next decade. Shareholders may view this as a way to "cut costs," in the numerical sense, but those costs represent real people. (In March, HSBC's compensation committee proposed a pay package valued up to $22 million for new CEO Stuart Gulliver.)
Pay reality check
Not all CEOs are overpaid, but they're not all worth the big bucks, either. In today's ugly, fragile economy, shareholders owe it to themselves -- and to our overall economic health -- to closely scrutinize CEO pay packages.
Shareholders must stop passively approving the millions paid to CEOs who destroy value instead of adding it. In some cases, these corporate managers' strategies may build unhealthy companies and unecessarily destroy jobs, both of which hinder our economy.
If CEOs want to make bank, they need to do more than just show up and start cutting staff. Difficult times call for down-to-earth measures. CEO pay needs to come down here with the rest of us.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.
At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Google, Lockheed Martin, Research In Motion, and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Google, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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