Is Executive Compensation Excessive?
The scrutiny of executive compensation has increased with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In particular shareholders can vote on executive compensation packages. While such a vote is non-binding it can result in considerable negative publicity for a corporation and could lead to shareholder lawsuits as has been the case for Citigroup. The Resource Tepee (US patent 7,495,673 B1) can be useful as a tool to assess if executive compensation is excessive. A juxtaposition of CEO compensation with those across all employees at each of the other band levels (or within functions at chosen band levels) in an organization through this visualization may be helpful. We return to the simulated corporation in our first example and look at compensation spread across functions and levels. This simulation of compensation assumes a 350 fold increment of CEO compensation over that of the average worker in the lowest band of the corporation. Professor G William Domhoff in his website on wealth, income and power in America cites an average 344 fold increment in CEO compensation over that of an average worker in 2007. Compensation in multiples of 30, 11, 6, 4, 2.5 and 1.5 of the base worker are assumed as we go down the band levels. The Bureau of Labor Statistics reports a wages of $13.36 and $15.31 per hour in 2008 for two occupations at the lower end of the pharmaceutical and medicine industry’s occupation categories. This simulation uses a compensation of $15.00 per hour at the lowest band. This average income drop-off is depicted in the following graphic.
The wine glass shaped graphic above depicts a likely drop-off in average compensation as we go down the salary grades in an organization. However we do expect the leaders of our industry to be reasonably well paid as their skills and talents can generate a lot of shareholder and employee wealth and they can make important contributions to our society. CEOs usually get to head organizations after a long hard slog and may have experience and skills to justify thier income levels and status, when acquired legitimately. The criticism of CEO compensation may be a distraction from the wealth and influence of the owners of industry. If we add them into our wine glass we would add a rim which stretches across our homes. One often sees articles in the media about ‘grass-roots’ activities funded by some of them. See reports, for instance, of the Koch brothers and their activities killing transportation initiatives in the New York Times and reports of the actions and influence of George Soros in the Wall Street Journal. Perhaps we should have them provide a reasonable fraction of their outlays, for such programs, to allow some debate and rejoinder when they venture into realms where a ‘1 person 1 vote’ perspective is more relevant than ‘1 dollar 1 vote’. Given that and the likely requirement of a subservience to and an enforcement of questionable agendas, it may be fair, within organizations, to see an executive’s compensation in the context of aggregate compensation across different levels and functions of the organization he heads. The aggregate compensation matrix (in 1000s of dollars) deriving from the income drop-off and the distribution of personnel as in our first example, is in the following.
Tepee looking at Compensation over an Entire Organization
The tepee below is a visualization of the distribution of compensation. What constitutes excessive compensation is difficult to address. One may needs a panel of sociologists, shareholder representatives, economists and other involved coalitions to address compensation. Graphics can be an aid in making these decisions. One could get some insights on compensation by laying this tepee next to a tepee done for the distribution of personnel as well as looking at the wine glass shaped average income drop-off down the hierarchy of an organization.
Please click on the graphic to see it in better resolution.