Cenek Report

Today's New York Times featured an article - "If All the Slices Are Equal, Will the Pie Shrink?" - that probably portends an escalating debate on the intended and unintended consequences of the ramp-up in executive pay since the early 90's.  Some are already forecasting the topic as a key issue in the next general election.

Two of the researchers identified in the Times article, Xavier Gaibaix of MIT and Augustin Landier of the Leonard N. Stern School of Business at New York University, argue that the explosion of CEO pay to new stratospheric levels is simply due an accompanying increase in firm size over recent decades. Other academics dispute this hypothesis however, and strongly belief that the run-away pay is due to a host of factors, and not just organizational size.

Several statistics are quite sobering:

1. The top 0.1 percent of American income earners receive nearly 7 percent of the total, the highest since the 1920's;
2. Fifty percent of the income increase in our economy due to productivity gains between 1966 and 2001 went to the top 10 percent of earners; and
   
3. During the period 1993-2003, the aggregate compensation paid by public companies to their top-five compensated officials amounted to $290 billion - and during 2001-2003, the top-five reaped $92 billion, which represented 10.3% of the aggregrate corporate earnings of those firms.

Even the poster boy of American capitalism, Warren Buffet, lamented in Bershire Hathaway's 2006 annual report that executive compensation is running amuck.

It's only ironic that the last attempt to rein in executive pay, which occurred during the first Clinton administration, may have actually exacerbated the problem. President Clinton believed that the tax code could be amended to help bring greater sanity to rocketing levels of pay. Section 162(m) of the IRS Code was amended to allow for a deduction for executive compensation in excess of $1,000,000 only if certain performance targets were achieved. Shrewd compensation quickly realized that stock-based compensation was not prohibited and served as the perfect work-around.

Similar attempts to legislate or regulate the problem are probably doomed to failure.  Pay reform is unquestionably necessary, as the incidence of unconscionable pay packages are increasing, and "super-sized slices shrink the pie," but we need to retain the philosophical tenants of pay for performance in our society and corporations.