The myth of CEO pay packets

THEY’RE supposed to have the hardest job, which is why they’re paid 100 times more than their average employee. But do CEOs actually deserve their massive salaries?

Qantas chief executive Alan Joyce has been the focus of much public discontent over the a

MARY Barra, the chief executive of GM, spent yesterday being grilled by the US Congress for her company’s years-long failure to fix a known safety defect in its cars. Barra’s lack of answers is being blamed on the size of the organisation she leads. Which is a great argument against the salaries that CEOs earn.

GM’s failure to recall millions of dangerous cars goes back a decade. Mary Barra took over as CEO in January. That is a convenient way for both GM and Barra to elude blame, but the issue this speaks to is a structural one in corporate America. Mary Barra’s pay package this year could add up to more than $14 million. The problem here is that high ranking corporate managers want to have it both ways: they want the pay of people who carry ultimate responsibility, without any of the responsibility.

Why, after all, do we pay CEOs tens of millions of dollars? The average CEO is paid hundreds of times more money than their average employee. Why? Research has shown there’s no correlation between higher CEO pay and better company performance. Nor is there evidence that companies can vault themselves ahead of their competitors by poaching their “superstar CEOs.”

GM chief executive Mary Barra fronts a congressional committee investigating a safety defect in the company’s vehicles.

The realistic reason that CEOs get paid so much, of course, is because their pay is set by a group of peers who all have a self-interest in keeping pay high, creating an upwards spiral that benefits all executives. But what of its alleged business justification?

The ostensible justification for executives getting paid more than everyone else is that they have more responsibility than everyone else. They make the hard decisions. They are paid for their judgment. They certainly don’t work harder than the janitor, but we suppose that their wisdom and knowledge is so valuable that its benefits for the company at large will outweigh their hefty pay packages.

This is, in general, a farce. While executives of huge corporations are paid to make the tough decisions, the fact is that they don’t know what the f**k is going on inside their own companies. It’s simply not possible. GM’s current crisis is a case in point. A law professor tells the Times that criminal liability against GM is a tough case, because “in a vast corporate structure with numerous rank-and-file employees and midlevel managers simply doing their job, it’s hard to pinpoint where responsibility lay.”

That echoes Barra’s own testimony about various non-communicative “silos” within the company, all ignorant of what the others are doing. The Wall Street Journal today dedicates an entire story to this dynamic, which effectively renders CEOs unable to exercise perfect judgment, because it’s impossible for them to know enough accurate information to do so: “The larger an organisation gets, the less likely it is that bad news will travel smoothly up the chain.

Sometimes CEOs are more trouble than they’re worth as David Jones found out when boss Mark McInnes became embroiled in a sexual harassment scandal.

“At big corporations, say organisational experts and former auto-industry executives, the mantra is “go along to get along,” and doing the right thing — which can mean stopping work on products vital to the bottom line — is often incompatible with pleasing the boss.”

Not only are CEOs unable to be the mythical Perfect Oracles of Business Judgment, but they tend to do everything in their power to avoid taking responsibility for failure. Too bad, since that heavy responsibility is a keystone of the justification for their pay. This is similar to the problem with how Wall Street traders and bankers are paid: they keep all of their winnings, but they disavow responsibility for their losses.

Their losses are socialised, but any effort to socialise more of their winnings through higher progressive taxes is decried as un-American. The public picked up the tab for Wall Street’s last meltdown. The people who had gotten rich by doing jobs that created the meltdown stayed rich. Nothing is taken back from them. Likewise, CEOs ensconce themselves in a world in which all of the successes of their enormous companies are translated into personal financial gain, and all the failures of their enormous companies are blamed on the fact that their companies are so enormous that no one can get a handle on them.

The biggest problem with CEO pay is not just that it costs shareholders tens of millions of dollars that they really don’t need to spend. It’s not even that the pay is unjustified. It’s that it allows some of the most powerful people in the world — corporate executives — to operate in a world with different rules from the real world. That leads to decision-making designed to favour the self-interest of corporate executives to the exclusion of everything else. And that leads to things like 13 deaths from faulty GM cars, because no one wanted to rock the boat.