Are CEO's overcompensated?

Not only the “usual suspects” but others have been pointing at the compensation packages given to chief executive officers of large corporations and claiming that the compensation is “too great” and should be reduced. Some are even calling for government regulation of executive compensation. 

As a believer in the “free market,” I think that the only ones who should determine the compensation of any employee are those who hire the employee. They are the best judges of the individual’s worth and they are the ones paying the compensation.  All other commenters have no responsibility to the employee,  the corporation or the stockholders.

 A  number claim the “moral imperative.”  Compensation “ought” to be in accordance with their world view.  If they would die and rise from the dead on the third day, I might listen.  However,  unless they bear a reasonable resemblance  to a  Supreme Being – all knowing and omnipotent –  I pass.

But the question remains. What is a reasonable compensation for a chief executive officer? 

First of all,  the question should be answered,  if it can be answered, based on readily verifiable data that is value neutral as to the question. In other words, don’t stack the deck!

I suggest the following test for reasonable compensation :

First :  we will measure the total compensation package of a CEO against the total sales revenue for a particular year.  The total compensation package must include all deferred payments received in the out years and the total sales revenue must include all adjustment to that year’s revenue.

Second : Ideally, we would compile this data on every cheif executive officer but that will create some disortion as a small corporation’s compensation may be greater in terms of corporate revenue.

  Two reasonable compromises are to just use the Fortune 500 or to just use corporations with sales revenues in the bilion dollar range. 

In either case, we then add the total compensation packages of the CEOs and divide by the number of CEOs. Then add the total adjusted  sales revenues of these corporations and divide by the number of corporations. This will give us two averages :  average compensation and average revenues.  Simple third grade division will give us the percentage of revenue received by the average CEO. 

Now, here is the kicker – if you have some experience and ability in mathematical puzzle solving – you have recognized what the results will show.  It does not seem right but, if you do the necessary math, you will find that, expresed as a percentage of sales, those huge CEO compensation packages are proportunately less than the average compensation package.