The New York Times, with good reason, paid particular attention to the case of Verizon. The firm's CEO, Ivan G. Seidenberg, received $19.4 million last year, in a mixture of salary, bonus, restricted stock, and other payments, a rise of nearly 50 percent over the previous year. That was justified, according to the company's compensation committee, because Seidenberg met some "challenging" performance benchmarks. So the company did well in 2005? Not exactly. Earnings fell by 5.5 percent, the company's shares dropped 26 percent, and its bonds were downgraded. The Times also reported that 50,000 of the firm's managers had their pensions frozen. (The company had a difficult year, you see: The pension freeze was doubtless a painful but necessary sacrifice.)
Verizon is on a list of 11 big companies accused of "paying for failure" by The Corporate Library, a corporate-governance research outfit. In a just-published study, TCL found that over the past five years board compensation committees "authorized a total of $865 million in pay to CEOs who presided over an aggregate loss of $640 billion in shareholder value." The 11 companies are AT&T, BellSouth, Hewlett-Packard, Home Depot, Lucent Technologies, Merck, Pfizer, Safeway, Time Warner, Verizon, and Wal-Mart. Each of these "paid their CEOs more than $15 million in the last two available fiscal years; had a negative return to stockholders over the last five years; and underperformed their peers over the same period."
But the problem goes much wider than this. Year in, year out, the median pay of top executives rises much faster than do overall wages and salaries. There is no reason why this should be so—not if the market for CEOs is working as rigorously as the market for other kinds of labor. But, of course, it is not. There is no economic rationale, no "incentivizing" justification, for enormous severance payments to departing (failed) CEOs, or for full-salary pensions worth eight figures or more, granted to bosses about to retire. The idea is a joke. The cases that TCL has drawn attention to, and the wider trend of rising CEO pay regardless of performance, show that the market for CEOs is broken.
That is a bad thing in itself—and, fairness aside, the scale of the resulting misallocation of resources is not small. An academic study published last year by Lucian Bebchuk and Yaniv Grinstein in the Oxford Review of Economic Policy estimated that from 2001 to 2003, the total pay of the five highest-earning CEOs of public companies was equivalent to nearly 10 percent of the companies' earnings, roughly double the share of earnings paid out that way from 1993 to 1995. Pay on that scale, if it elicits no improvement in company performance, is perceptibly depressing return on investment. That, as I say, is serious enough, but a far larger cost comes in damage to the system's reputation.
Most CEOs understand, or say they understand, that capitalism needs the tacit support of the public to function well. In fact, to judge by much popular culture, Americans are already fairly distrustful of capitalism—but these things are relative. If Americans were as hostile to big business as, say, the French are, then the tax and regulatory regime for American companies would quickly evolve to become as unfriendly and dysfunctional as France's. When compensation committees vote huge and patently unwarranted pay increases for their nonperforming CEOs, they are working to that end. They are not just failing in their duty to the shareholders whose interests they are paid to uphold, they are hurting the rest of us as well. They are undermining capitalism more surely than its avowed opponents and making its defenders look like spokesmen for base hypocrisy.