Stories about obscenely excessive executive pay offer high titillation value, interesting insights into social anthropology and important arguments about economic fairness. I always read them.
But I have never really considered the whole issue of executive compensation to be of enormous economic consequence because I assumed that in the grand scheme of corporate cash flow, CEO pay was but a ripple in the river.
I was very wrong.
From 2001 to 2003, the total compensation paid to the top five executives at public corporations totaled 9.8 percent of the total earnings of those companies.
One-tenth of all corporate earnings in America's publicly traded corporations went to paying the top five chiefs on the totem pole. That has economic consequences.
These figures come from a fascinating recent paper
In the 2000 to 2002 period, the top five bosses at public companies took in a stunning 12.8 per cent of corporate earnings. That's a huge slice of the American economy going to a tiny population.
In the 11 year period, that cohort received total compensation of about $351 billion; about $192 billion of that just in 1999-2003. Remember, this is only the top five executives. They might not even be the highest paid people in a company; an investment bank may pay a star trader more than one of the top five executives in the food chain whose compensation must be revealed to the SEC by law.
The authors discovered that pay increases grew in public companies of all sizes and in all sectors. Compensation grew by much more than can be explained by the performance or growth of the companies; pay did not increase because performance increased.
Pay at the top of public corporations grew much more than at the top of other highly paid fields such as law, engineering and accounting.
Compensation in the form of stock and stock options, of course, grew in the 1990s, but there was no corresponding reduction in conventional salaries. This was true of "old-economy companies" and "new-economy companies." Everything grew for the corporate brass (except public approval as measured by public opinion research).
So if compensation grew proportionately way more than corporate performance and the market, what's the explanation?