Should CEOs Be Paid Less?


In recent years, few things have enraged Main Street Americans as much as the incredible salaries and bonuses that Wall Street executives enjoy.

According to the AFL-CIO, the average CEO of an S&P 500 company earned about $9.2 million in 2009, including bonuses, stock awards and other compensation. That works out to be more than 300 times the amount that the average U.S. employee makes.

Interestingly, that ratio actually favors the CEO less than it did a few years ago. In 2000, these CEOs earned 525 times the amount of the average employee. But don’t expect that fact to make Americans any less enraged. All it takes is a few ludicrous paychecks to stoke our fire.

As pointed out in a recent article, several CEOs actually earn more money in an hour than the average American earns in a year (about $32,000). For example, John Hess, the CEO of the gas company that bears his last name (Stock Quote: HES), earned $154 million in 2008, which works out to be $74,317 an hour, or more than double the average worker’s salary.

Ludicrous CEO salaries may not just be bad for the company’s public image; it may also hurt the company’s employees. Last month, researchers from the University of Utah and Rice University presented a new study that calculated the correlation between executive compensation and how those executives treated lower level employees. The results were startling.

"Increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy,” said Sreedhari Desai, one of the study’s co-authors, according to the Harvard Business Review. Essentially, the study found that the more money executives made, the more they seemed caught up in their own power and insulated from the concerns of their workers. "The higher the income inequality the more they perceived power and the more likely they would fire average-performing employees."

In the past, some have tried to justify higher CEO salaries by arguing that it attracts better talent and leads to bigger company profits. Yet recent studies are ambiguous at best.  Earlier this year, BusinessWeek noted one report that found there is no correlation between the performance of a company and its CEO’s salary.

All of this boils down to one fundamental point: Is it actually a good investment for a company to spend millions of dollars a year on its CEO? DailyFinance points out that the salaries of CEOs at companies like AT&T and Walt Disney are enough to hire more than 1,000 new employees each. Might that be a more worthwhile use of company money?

Now, to be fair, some executives do work for next to nothing. Apple’s Steve Jobs earns just $1 a year (plus stock options) as does Google CEO Eric Schmidt. Some bloggers urged the big banks to force their CEOs to do the same following the bailout. But while this might sit better with the American people, it could be equally bad for companies in the long run. Several experts have pointed out Japan’s compensation model, where the vast majority of CEOs earn less than $1 million a year, arguing that the downside of this is that it’s harder for those businesses to compete and attract the best talent from abroad. So yes, we don’t want our big businesses to lose their edge in attracting talent, but does it really take $9 million or more to attract that talent?

What do you think? Are CEOs being paid too much and should businesses change their compensation models? Let us know in the comments section.

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