CEO pay is rigged.
If that sounds more like a late-night presidential tweet than a fact, let’s consider the evidence.
The compensation packages of the chief executive officers of America have been rising faster than just about any rational metric upon which they are supposedly based. “CEO pay grew an astounding 943% over the past 37 years,” according to a recent Economic Policy Institute analysis. EPI further observes this was a far faster growth rate than “the cost of living, the productivity of the economy, and the stock market.”
CEO compensation isn’t the pay for performance its advocates claim. Instead, it is unmoored from any rational basis. This makes it an inappropriate wealth transfer from shareholders to management.
You can place much of the blame on compensation consultants and the corporate boards that hire them. Boards are supposed to act on behalf of shareholders when they are considering the pay packages created by the former. But the relationships are riddled with conflicts that produced the charade we have today.
That we are discussing packages and not mere salaries should give you the first inkling of how far around the bend the issue of compensating corporate executives has gone.
Compensation consultants created easily reached targets as a basis for so-called performance-based pay. But even that low bar has been bastardized. It isn't merely the gluttony; rather, it’s the performance, or often the lack of it.
Consider the findings of the research firm Audit Analytics. According to the Wall Street Journal, Audit Analytics looked at how often the term “non-GAAP” appeared in proxies disclosing management pay for companies in the Standard & Poor’s 500 Index. It found that the phrase showed up 58 percent of the time last year, up from 27 percent five years ago.
GAAP, of course, stands for generally accepted accounting principles. Using non-GAAP accounting creates much easier performance targets for senior management to hit to justify fat compensation. This is consistent with earnings being increasingly gamed by companies. But it is also an admission by management that, whatever quibbles you might have with GAAP, a lot of non-GAAP accounting means that they’re just making it up as they go along.
Improvisation may be great for jazz musicians and stand-up comedians, but it has no place in the tool kit of corporate executives and accountants. But that is the only way that many underperforming management teams are able to capture their gargantuan compensation.