Executive compensation: analysis of CEO salary practices

¶ … American economy are running rampant and on any given day the central issue may change but one issue that seems to keep reappearing is the one regarding the amount of executive compensation. In an era when unemployment is registering at record highs and more and more manufacturing companies are leaving American shores for other destinations, there appears to be no slow down in the amount of compensation that businesses are willing to pay their top executives. While the wages of most American workers have decreased over the past two decades, the wages of most American CEOs have skyrocketed. A fact that has irritated many Americans and which has placed a major barrier between the American workforce and corporate management.

The issue of corporate compensation for their executives has many aspects (Core, 2005). The issue can be examined from the aspect of performance. It can be examined relative to the pay of the other employees and it can be examined from the standpoint of overall fairness. Regardless of which approach is adopted, the issue is one that has created a great deal of acrimony and this state of acrimony cannot be expected to be dissipated any time soon.

The interesting aspect of executive compensation is that it is obtained in the same way that the unions obtained their wages for their members: negotiations. Those individuals who seek high level executive positions sell their services in much the same way that the unions have been doing for several decades and it is the same individuals who doled out the union contracts that everyone now seems to criticize who are now doling out contracts to the executives. It is the members of the board of directors for the corporations who are representing the business at the negotiation table and they are the ones directly responsible for paying executives in the millions. Interestingly, the same executives who are the beneficiaries of these rich contracts are the first to criticize the contracts negotiated over the years by the unions.

What precisely is an executive's duty to his employer? Legally, all corporate executive are considered fiduciaries of the corporation and have a responsibility as a fiduciary to place the interests of the corporation ahead of their own interest (Fairfax, 2005). There is also a strong argument that corporate executives occupy a fiduciary position relative to shareholders (Katz v. Oak Industries, 1986). Therefore, corporate executives owe a duty to both the corporation and its shareholders to act at all times in a way that does not endanger the financial interests of the corporation.

Accepting the reality that corporate executives have a legally recognized fiduciary obligation how should they be expected to manage the business which is employing them? Corporations exist to maximize profits and shareholders invest in stock to make money (Friedman, 2005). Neither the corporation nor the shareholder has any interest in losing the value of their money. If this is so, then the executive has a fiduciary duty to manage the business in a way that best guarantees that the corporation makes money. This is where the issue gets far more complicated.

In the capitalistic world, money is the method by which businesses motivate their employees to perform at their best and most efficient level (Wasserman, 2006). Theoretically, there should be a point where every worker is compensated at the level that he is most properly motivated and returns the best value back to the business. The goal of every business is to ascertain what this level is for every employee. No one, and especially highly trained and experienced business executives, can be expected to work for nothing and good talent comes at a price but it is highly arguable that the salaries being paid today's business executives are a legitimate value of their worth.

For many years now corporations have effectively marginalized the value of the most employees. The salaries paid the line workers at manufacturing plants have been factored into the cost of production line any other commodity. The goal of management has been to reduce these costs as much as possible. On the upper end of the scale, should not the goal be to do the same thing? Executive salaries should be subject to the same considerations and corporate directors should be attempting to attract and retain the best executive talent available at the least possible cost and, more importantly, those same executives should be willing to work for that same cost. Their fiduciary duty demands that they maximize profits and minimize costs. This should require executives to refuse any payment in excess of what he or she is worth to the corporation. Unfortunately, this is foreign to human nature and, despite the presence of a fiduciary duty, there are few human beings capable of making such assessment. In the case of regular employees, this assessment is done for them. There are hundreds of accountants working on that matter but for executives it falls upon the shoulders of the board of directors who have seemingly allowed the situation to grow out of control.

It is fashionable to compare executive pay to that of professional athletes and entertainers in an attempt to justify the exorbitant salaries. The argument is that if professional athletes and entertainers can be entitled to such high earnings surely executives who have attended the finest schools and worked long hours to attain their level of expertise are equally entitled. Unfortunately, this argument fails on several levels. First, the market for professional athletes and entertainers is established by the market. As long as the public is willing to pay the high admission prices to see their favorite athletes and entertainers, the salaries of such athletes and entertainers is justifiable. The market determines the financial worth of these individuals.

Secondarily, professional athletes and entertainers are not under any fiduciary duty to protect the financial interests of their employer. They may have other duties but they do not have any legally recognized fiduciary duty. The responsibility of athletes and entertainers is to themselves. Their incomes affect only their own bottom line and not that of a corporation.

Finally, unlike the corporate executives, professional athletes and entertainers are not socializing with the same people who determine their salaries. In the case of corporate executives, they are playing golf and dining with the same individuals who are in control of determining their salaries. There is no such thing as an arms-length negotiation relative to executive compensation. It is a circuitous situation wherein a special club is created where each member supports the interests of the other.