CEO Pay

After reading the article in the New York Times yesterday on the hundreds of millions of dollars in compensation given over the past few years to the CEO of Home Depot, I ran across this: in 1949, the highest paid CEO in America was Charlie Wilson of General Motors, who earned $586,100 in salary, bonus and stock. That's roughly equivalent to what some of the better-compensated CEO's are making today.

But what did Wilson pay in taxes? $430,350.

Times have changed.

Comments

[Nate]

Oh yes! Let's redistribute all the wealth and then everyone will live in perfect harmony! No better way to encourage success than to reward it with robbery in the name of the "common good," right comrades?! After all, it's worked so well in other countries...

[Alex Foley]

"...equivalent to what some of the best-compensated CEO's are making today."

Maybe their base salary. Consider what the Wall Street Journal reported today in an article on the new tech boomers and their million dollar homes:

"Executive Officers of Silicon Valley's 150 biggest companies exercised more than $1.84 billion in stock options in fiscal 2006, up 77% from 2003, according to compensation-research firm Equilar Inc."

Perhaps it's not the salaries we should be worried about taxing.

[james]

First, let me just say that Im not 100% sure that Mr.(Dr.?) Gladwell was advocating socialism as the first poster suggests. However, I am very excited to see that someone understands how to adjust money for inflation and see how little growth there has been in executive pay (on average). If only the public wasnt so afraid of math.

[Chris Gonzalez]

CEOs would do well to generously and vountarily redistribute their wealth among their own employees. It builds good will, it builds employee loyalty, and furthermore it lifts many families who could use a little something. The CEO of Costco is an excellent example.

Wealth and power greatly accumulated are best used when given away for the general and common good.

[David]

He paid 73% in income taxes? Can you cite your source, Malcolm?

[Michael]

Actually the old Ben & Jerry's model could be applied here...

No employee shall earn less than 1/7 that of the CEO.

Now just give that entry employee 1/7 stock options and it would all balance out.

[MJB]

I work in a law firm. The shareholders and partners make millions. I make considerably less. They get bonuses. I don't. Support staff receive raises of 2 to 4%. This completely demotivates us and ensures that we all do the bare minimum necessary. And while the attorneys may feel that there is a spirit of bon homie here, there isn't.

[Chris C]

Sloppy & misleading math, Malcom.

According to the Inflation Calculator (http://www.westegg.com/inflation/) $486,100 is worth about $3,730,474.72 today.

Assuming 5% inflation every year since 1949, $486,100 is only worth $7,470,100 today.

That's absolutely a lot of money, but as far as CEO pay goes it's not all that remarkable. Which might be a sad indication of the state of CEO pay...

It seems to me that the $486K of 1949 was a far more restrained sum than we typcially see today. As far as the tax bill you quote, I agree with David and would really like to see a source cited on that. 73% seems high, unless Charlie Wilson was British. :)

[David]

Actually, Chris C, I just looked it up. According to the IRS, the highest tax bracket in 1949 was 82.13% and applied to incomes over $400,000.

It went up to 92% a couple years later!

But still, it would be nice to see sources cited up front.

[Chris]

Nice post.

Yep, it was cranked up pretty high until the Kennedy administration. It's true, cutting the top rate from 70% to 50% probably does increase revenue. Cutting it from 39.6% to 35% definitely does not.

I can't watch old movies without the BLS inflation calculator!

http://data.bls.gov/cgi-bin/cpicalc.pl

[rick]

How long was the typical tenure as CEO of a major corporation back in those days?

My guess is that it was much longer than it is today.

[Malcolm Gladwell]

Here's the cite:

Kathy Groehn Ell-Messidi, "The Bargain: The Story Behind the Thirty Year Honeymoon of GM and UAW." Nellen Publishing Company, 1980. p. 32.

And yes, it would be more accurate to say that Wilson would be in the mid-range by today's standards. It's just the tax rate that boggles the mind.

[R J Keefe]

I'm not sure that going back to a high tax rate is anything but a bad idea, but I do believe that CEO compensation ought to be a decent, not obscene, multiple of the rank and file's.

There are days, though, when the Bush Administration makes me a socialist.

[MarcV]

CEO pay is more of a function of supply and demand. Their salaries are bid up as a few successful ones accept bigger compensation packages from other companies. The companies left behind have to either place untested talent at CEO or pay the market price (or above) for a proven leader.

Ask the Chinese how well things are going when CEO's are "hand-selected" and have their salary/compenation controlled. Without a true market economy to winnow out the losers, many of the Chinese-run corporations operate under huge deficits (propped up by the state).

[J.lasater]

According to CNN Money, the average CEO salary was $11.8 million in total compensation in 2004. This means that Wilson's salary is actually below the current average. (http://money.cnn.com/2005/08/26/news/economy/ceo_pay/)

Next, according to Tyler Cowen on the NY Times, CEO pay rose by a factor of 6 since 1980 - 2003. Incidentally, average market capitilzation rose by 6 as well. So it would seem that if the pay is tied to market cap, it is justified. (http://www.nytimes.com/2006/05/18/business/18scene.html?ex=1305604800&en=7a9ec617cdea9e1a&ei=5090&partner=rssuserland&emc=rss)

His article explains a good bit about CEO compensation by boiling it down to supply and demand. If there are more big companines than good CEOs, bidding will increase s

Last, many folks talk about how pay is not tied to performance which seems like a reasonable argument. However, few salaries in the workplace are actually tied to performance and when they are, the incentive is not effective.

The idea of incenting people to work better through commissions and other direct means of compensation has been widely discredited among students of management. There is just no long-term correlation between incentive pay and performance, so why would it be any different for CEOs?

(sry no link, but Alfie Kohn has written lots for the Harvard Business Review about this)

[Terry Bain]

Wow. I didn't know so many people could so often and so easily miss the point.

The point being...

...what was the point?

Oh. Yeah.

Nice tie!

[lucie]

Very illuminating, Malcolm. It's hard to believe that tax rates in the U.S. were, in fact, so "socialist" such a short time ago. It would be interesting to see an extended feature (hint, hint) about exactly how America got from that kind of system to a day when such tax rates sound like commie talk!

[J-Lon]

Gee, during the period from 1945-1965 the U.S. was what, only the most prosperous country in the history of the world? And the middle class was growing in that period, right?

Call me a socialist if you want, but those don't seem like bad things to me. Maybe having a tax policy that requires people at the top to bear a larger share of the burden played a role in that, by giving the government more money to spend on things like education and social programs.

Today, our middle class is shrinking and our society is looking more and more like a Pareto power law curve. That doesn't really seem like something to be proud of, even if you happen to be one of the 20% in that equation who is a "winner."

[Chris]

The history lesson is interesting, but perhaps a more prescient comparison exists between American and European CEO's. American CEO's make around twice as much as their peers across the pond - does that mean American CEO's generate twice as much value for their companies?

[Jeff]

Nate,

You are not getting the point pal.

Imagine if there was a proper/fair income tax system in place, how much Richard Grasso, who took home $200 million annually for his job at NYSE, would pay in taxes?

[Charles H. Green]

Chris C's data seems to directly contradict Malcolm's conclusion that Charlie Wilson's compensation was "roughly equivalent to what some of the better-compensated CEO's are making today." Particularly if you factor in options et al, the "better-compensated CEOs" are now making multiples more than in the past.
Indeed, my first instinctive reaction was, 'what inflation rate was Malcolm thinking of, that sounds way off.'
Chris C.'s data confirms the "multiple-of-lowest-employee" measures.
By any reasonable measure, CEOs' compensation levels have grown grossly higher over the decades. I sincerely doubt that "supply and demand" adequately explain it. For one thing, the same economic theory would suggest that higher salaries would serve to attract higher supply, thus levelling out demand and lowering salaries. Further, if the average tenure of CEOs is decreasing--as it is--then there are more CEOs with experience, which also ought to dampen demand. But that hasn't happened.
I'm much more inclined to look at cross-linked boards, self-dealing members of board compensation committees, and the group-think encouraged by HR exec compensation firms that suggest "our CEO obviously must rank in the upper half of compensation."
Don't forget, 50% of the doctors graduated in the lower half of their class. It's a mathematical certainty. But when was the last time Hewitt or Towers Perrin suggested to a client that "you ought to pay your CEO in the bottom half of the market?"
As for peformance justification, J Lasater is dead right; anyone interested in this topic absolutely ought to read Alfie Kohn, either from HBR or from his several books, e.g. Punished by Rewards, on the disconnect between incentives and performance.
I graduated from HBS the year after Dubya, so I'm a card-carrying capitalist, but I'm with J-Lon; somehow we've gotten to the point where US taxation rates in 1949--when Joe McCarthy was just getting going--were socialist or worse.
Seems to me that was the generation and the era that catapulted us into economic leadership--and with those tax rates. Nowadays, I fear we're more in decline, and the effect of lowered tax rates on CEOs seems to be only to make larger the gap between rich and poor.
The more honest explanation for what has happened is that we've been hijacked by corporate elitist self-dealers whose time frame is short and whose focus is in the mirror.

[Kevin Bertsch]

Charles Green and J-Lon seem to forget that in the years 1949-1965, the USA was pretty much the only country world whose industrial base was untouched by WWII (Canada too, but in a much smaller way). There are those who would say the US's industrial capacity was actually increased by the war. The high tax rates were a necessity to pay off war debts and fund the rebuilding of Europe.

I doubt very much whether either would like to see a replay of the WWII scenario - the rest of the world more or less devastated by terrorist nuclear bombs, while the US remains isolated and "safe" - but that's the only way the US will ever enjoy a hegemony again.

Might stop global warming, though.

[Charles H. Green]

Following up on Kevin's response; if it was right to pay off war debts incurred to increase our productive capacity (which I agree it was right to do, and I agree we did benefit from that investment), isn't it even more necessary to pay off debts today which were incurred to finance consumption, with no hope of productive payoff? Isn't it even more necessary for us to raise taxes now? And what has all that got to do with isolationism, terrorism or safety anyway?
Malcolm suggested two simple points: CEOs aren't all that more highly paid now than before, and taxes used to look ridiculously high.
I'd respond, CEO compensation HAS gotten relatively higher today than Malcolm seems to suggest; and tax rates, which appear high to Malcolm--I'm guessing from the perspective of the last few decades--don't appear so unreasonable from a longer term perspective. In fact, it's today's tax rates which appear short-term and beggarly relative to future generations.
Come to think of it, that's the same problem with CEO compensation. I knew Malcolm had a link between the two.

[J]

"The companies left behind have to either place untested talent at CEO or pay the market price (or above) for a proven leader"

I'm not sure going after dollar amounts focuses on the real problem.

Two things cause me to get upset about CEO pay. First, this "talent" business - I don't begrudge the CEO of an extremely profitable company his nine figure pay package, but if those profits are the result of, say, commodity prices he has no control over whatsoever, stop giving me this BS that he's any different from a powerball winner.

Second, and what really makes my blood boil, is not the guy making 200 mil for doing a good job, but the guy making 5 mil who is demonstrably stupid and incompetent. If a guy drives a company into bankruptcy because of general stupidity and/or fundamental misunderstanding of the business he's in, instead of some huge severance package why can't the company cancel his contract and sue him to recover every penny he was paid in excess of minimum wage? And why is he allowed to "leave to pursue other opportunities" rather than being thrown off the property by security with a press release from the board explaining that he's too stupid and incompetent to run a lemonade stand, much less a large corporation?

I get a lot more upset about average pay packages given to idiots than I do over astronomical pay packages given to guys who presided over astronomical profits, even if their contribution was marginal.

[T.]

I don't think Gladwell is advocating that level of taxation, just pointing out that things have changed.

I hope.