We frequently hear the cry that the rich are stealing the rest of us blind. This accusation is particularly pointed towards those receiving vast compensation as the CEOs of companies. Their compensation is so high, that their annual earnings are multiples of what the rest of us will make in our entire lifetimes. Fortune magazine reported that for 2016, the average CEO of a Fortune 500 company received $16.6 Million (up from $13.8M in 2014 and $10.5M in 2012).
The youth are particularly loud in their claims that the CEOs are stealing from them, and in their demands that they get some of this money. Well, the youth are correct that these corporate chiefs are stealing; it’s just not from them. The CEOs, it turns out, are stealing from people that own the companies they operate.
Before I went into management consulting, I used to think that only a small group of individuals possessed the knowledge, skill, talents and expertise required to successfully run a large company. This is the rationale that executives would have you believe exists to justify their almost inconceivable compensation. Then I started working with such people. Got to know them, found out what they were doing and how they were doing it. I then came to realize, firsthand, that these people are no different from the rest of us. They are mostly intelligent, focused, and hard working. But any large company has a host of such people that could competently run it. The person at the top was no more successful or talented than these other business professionals; they just were in the right place at the right time, and with the right connections, when the advancement opportunity presented itself.
The CEO thieves run publicly held companies. They don’t own the company, the shareholders collectively do. If a company has issued a million shares of stock, each share represents a one millionth ownership of that company. The shareholders actually own the entire company, all of its buildings, all of its assets. The shareholders also have a right to the company’s profits. If they so desire, shareholders can collectively demand distributions of the company’s profits. Salaries and other compensation directly reduce a company’s profits. So the CEO’s salary is a direct reduction on the profits the shareholders legally own.
There are two reasons CEOs get the compensation they do. The first is because the board of the company approves it. A company’s board is supposed to represent the interests of the shareholders. Unfortunately for most shareholders, the board is usually made up of CEO cronies. They get something like $50K a year to attend a paltry number of meetings, where they usually vote for things the CEO recommends, one of them being the CEO compensation package. Shareholders get to vote for people nominated to join the board, but they are nominated by other people already on the board. And since they like the pay and perks of being on the board, they usually aren’t going to make waves.
The second reason is that few shareholders care about getting their share of a company’s profits. The vast majority of shareholders didn’t “invest” in the company for the long term. Instead they buy the stock for a short period (months or weeks, or even minutes), and are interested only in the movement of the stock price while they hold the shares. This is an aberration enabled by the speculative economic system we currently live in.
What to Do
CEO compensation needs to be brought back to reality. Historically, people running public companies have made about fifty times as much as the average worker. Company boards need to truly represent the interests of shareholders. To do so, they need to be truly independent of the executive team. Corporate regulations need to be adjusted to eliminate crony boards. These regulations should make the selection process much more open to shareholder input and do more to improve shareholder board selection. We need to ask those that write such regulations, our political representatives, to do so.
Shareholders need to do more to demand that the board not allow these obscenely out-sized compensation packages for executives. Shareholders need to take a vested interest in what is going on at the companies they are partial owners of. They need to reject the re-election of board members that have created and continue to allow overpriced executive compensation packages.