Walter Williams
Are CEOs overpaid?
http://www.NewsAndOpinion.com |
In the wake of the Enron and WorldCom corporate scandals, the
purveyors of envy have found another opportunity to preach about what they
consider the evils of high CEO salaries, retirements and bonuses. After all,
according to them, evil must be afoot when a corporate executive earns more
in a week that the average worker earns in an entire year. Let's look at it.
Dishonest Enron and WorldCom CEOs are rare among corporate
executives. As such, all CEOs shouldn't be tarnished for the misdeeds of a
few any more than we'd tarnish all newspaper reporters because a few among
their ranks were liars like the Boston Globe's Patricia Smith and Mike
Barnacle, Jayson Blair of The New York Times, and The Washington Post's
Janet Cooke.
Is a CEO worth millions of dollars to a corporation? When Jack
Welch became General Electric's CEO in 1981, the stock market judged the
company to be worth about $14 billion. Through hiring and firing, buying and
selling, Welch turned the company around before he retired in 2001. Today,
GE is worth nearly $500 billion, making it one of the most valuable
companies in the world. What's a CEO worth for providing the brains and
leadership to turn a $14 billion corporation into one worth $500 billion?
How about paying just a measly one-half of a percent of the increase in
value? If that were the case, Welch's total compensation would have come to
nearly $2.5 billion, instead of the few hundred million that he actually
received.
The Gillette Co. was in the early stages of corporate death in
2001 when Jim Kilts took over as CEO. The company's stock had lost almost
half of its value in two years, and sales volume and market shares of its
major brands had plummeted. Between the time Kilts took over at Gillette and
this year's Jan. 28 announcement of Procter & Gamble's purchase of Gillette,
Gillette's market value increased by $11.3 billion, a 34 percent
improvement, and since the announcement, Gillette's value has risen by
another $5.7 billion.
Kilts' salary and bonuses over the past four years, totaling
about $17.5 million, haven't been especially large by CEO standards.
Predictably, however, Kilts' pay and particularly the size of his
compensation package from the merger — $153 million — have been the
subject of media carping, particularly in Boston, where Gillette is
headquartered. This figure is indeed large, but it, added to what Gillette
has paid him since 2001, makes Kilts' total compensation a mere 1.5 percent
of his contribution to Gillette's value.
Here are a couple of questions to you: If you were the owner of
GE, and a CEO could turn your $14 billion corporation into a $500 billion
one, how much would you be willing to pay that man in salary and bonuses?
Or, in the case of Jim Kilts, turning Gillette from a corporation in steep
decline into one Procter & Gamble was willing to buy for $57 billion, how
much would you be willing to pay?
Then, you might ask yourself: If a corporate board of directors
could buy a $300 computer that could do what a CEO could do, would it pay
CEOs millions of dollars? By the same token, if an NFL owner could hire a
computer to make the decisions that star quarterbacks make, why would he pay
some of these guys' yearly compensation packages worth more than $10 million?
There's another important issue. If one company has an effective
CEO, it is not the only company that would like to have him on the payroll.
In order to keep him, the company must pay him enough so that he can't be
lured elsewhere.
If you ask me, I know of only one class of workers who are
overpaid and underworked — college professors.
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