Abstract
The debate over appropriate compensation packages for CEOs has become increasingly divisive within the past decade and has been largely fueled by the media's speculation and reporting as to the cause of America's economic challenges. We are skeptical that those hailing for CEO compensation reform truly understand the economic and political complexities with which corporations must deal.
Compensation terms are determined by each company's Board of Directors (BOD) and by utilizing established metrics for performance evaluation. Metrics on which Board's rely more heavily than merely the ratio of CEO pay relative to average worker's pay consist of meeting or exceeding internal company metrics, company performance relative to industry competitors and special awards or recognition received. We believe that the BODs are most qualified to determine the value of an employee's contribution to the company and are in positions of responsibility to quantify that value into terms of a currency.
CEOs are highly-intelligent and possess advanced degrees from the world's elite academic institutions and anticipate a return on their investment. They also commonly spend at least 70 hours per week behind their desks and undertake the greatest responsibilities within the company. Individuals with such commitment and accomplishments in their backgrounds warrant compensation packages greater than that of employees with lesser skill sets and responsibilities.
The impact of the chief executive on the success or failure of a company is broader than any other employment position and placing a ceiling on compensation is akin to placing a ceiling on the CEO's motivation. Incentive-based compensation packages for CEO's align the executive's interests with those of the firm's owners. Although compensation numbers have grown in the past 30 years, so too has the performance of their companies.
CEOs do not procure the largest professional salaries. Practitioners within the finance industry and entertainment stars reap the windfall compensation packages.
We conclude that external intervention on matters germane to CEO compensation is unwarranted. Our "capitalist" economic system operates with the freedom allowing the markets to determine prices. We conclude that it is also appropriate to allow those same markets to determine the value of executive leadership.
