Does CEO pay reflect big ability or undue influence?


AJC reporter Russell Grantham is tracking what Georgia’s major public companies pay their top executives. Look for periodic news and trend stories in the weeks ahead, as well as up-to-date statistics, as Grantham pores through this year’s corporate proxy statements.

2012 CEO Pay in Georgia

Five of Georgia’s largest companies have reported CEO pay so far this year.

Company/CEO….. Total 2012 compensation….. Percent change from 2011

Coca-Cola CEO Muhtar Kent….. $30.5 million….. 5 percent

Genuine Parts CEO Thomas Gallagher….. $10.7 million….. 30 percent

Coca-Cola Enterprises CEO John Brock….. $10.2 million….. -3 percent

NCR Corp. CEO Bill Nuti….. $9.8 million….. 16 percent

SunTrust CEO William H. Rogers Jr……. $9.5 million….. 3 percent

Source: Company proxy statements

Are America’s corporate captains overpaid?

It’s the question that has launched hundreds of shareholder “say on pay” votes across the nation as CEO pay has soared while many workers’ fortunes have flat-lined.

From 1989 to 2011, the typical CEO’s pay at the largest public companies in the United States grew by more than 300 percent after inflation, to an average of $10.5 million, according to Forbes magazine. At dozens of companies, executive pay has gone far higher. McKessen CEO John Hammergren, for instance, took home more than $131 million in pay, including stock gains, in 2011, according to Forbes.

Overall CEO pay likely went up again in 2012, according to some experts. Last year’s executive pay figures are detailed in proxy statements being released by companies over the next several weeks. The Atlanta Journal-Constitution is analyzing those disclosures as part of a detailed look at the pay of Georgia’s top executives.

Meanwhile, the typical worker’s pay has risen less than a third as much in percentage terms during the same time, to $26,965 in 2011, according to the U.S. Census Bureau. After inflation, median pay has risen just about 8 percent.

In the wake of financial crises in both the United States and the European Union, such huge pay gaps between the top bosses and employees have provoked a public backlash and legislation to give investors more control over executive pay.

Since 2011, the Dodd-Frank financial reform law has required almost all U.S. public companies to hold non-binding “say-on-pay” votes where investors can weigh in on executive pay plans at annual shareholder meetings.

While most firms pass the say-on-pay ballots, some experts say the votes have still pressured companies to do a better job of tying their executives’ pay to financial performance.

Earlier this month, Swiss voters overwhelmingly supported new rules giving shareholders a binding veto over executive pay they view as too high. The measure also bans big signing bonuses and exit packages for executives, with potential jail penalties.

The vote followed disclosures last month that Novartis, a Basel, Switzerland-based pharmaceutical company, had planned to award a $78 million golden parachute to its departing chairman. The company backed away amid a public furor.

Germany — where CEO pay is modest by U.S. standards — is likewise considering similar executive pay curbs. Most of the EU’s finance ministers also plan new rules to cap bankers’ bonuses.

Through such initiatives, angry citizens in several countries have been saying that yes, executive pay is too high.

But economists and other academics also have been intensely debating that question for years. And what they’ve come up with — without apparently coming to any consensus — is two very different theories as to what has been driving executive pay up over the past few decades.

According to one school of thought — let’s called it the “superstar” theory — the most highly-paid CEOs deserve what they’re paid because they’re a rare breed of corporate leader, superb at managing today’s business empires.

The larger and more technologically and globally complex companies become, these folks argue, the more valuable the superstar CEOs are, because they can use their superior skills over a larger operation to generate more profits.

In a 2007 study and later updates, Steven Kaplan and Joshua Rauh, then both at the University of Chicago Graduate School of Business, found that executives earned the fattest paychecks at a relatively small number of the largest and most profitable companies. That fit the profile, they argued, of the huge pay earned by a small number of “superstars” in other professions — professional athletes and celebrities, top-performing hedge fund managers, and the most sought-after corporate lawyers.

The highest-paid executives, the researchers noted, tended to work at the largest companies with the highest market values, they noted, implying that they also have a sort of superstar status.

Joel M. Koblentz, a longtime recruiter of top executives and company directors, partly agrees with that rationale.

“What I’ve learned is that talent is always short,” said Koblentz, senior partner of Atlanta-based Koblentz Group. Companies have to pay a premium to lure the best candidates from other firms, and to continue paying enough to keep them from leaving, he said.

Still, he said, executive pay has risen too much lately, partly because stock awards companies granted during the 2007-2009 financial crisis have since grown tremendously in value.

“You can’t predict these things, but what you can predict is if you give [executives] a big slug of stock, they will be on the same side of the table as shareholders,” he said.

Most companies use such stock awards as a long-term incentive — a way to make some of executives’ pay subject to the same ups and downs in stock price as investors, he said.

But the problem, critics say, is that companies’ boards of directors are routinely too generous in awarding stock grants, bonuses and other pay to top executives.

According to this other major school of thought — let’s call it the “board capture” theory — today’s CEOs have too much influence over companies’ corporate boards of directors. They have skillfully captured far more money and power than can be justified by their performance or by economic forces alone.

In a recent study, researchers at the University of Delaware concluded that the marketplace for executive talent is effectively broken and that corporate boards are using flawed methods to set pay.

“It is increasingly apparent that the pay awarded to chief executives is becoming profoundly detached from not just the pay of the average worker, but also from the companies they run,” wrote Charles Elson, director of the university’s John L. Weinberg Center for Corporate Governance, and Craig Ferrere, a research fellow at the center.

By constantly pegging executives’ compensation to other executives’ pay packages at a peer group of other companies, they said, many corporate boards are ratcheting up pay in what critics call “the Lake Wobegon effect.” Like the children in Garrison Keillor’s fictional Minnesota town, these critics say, many companies are paying their top executives as if they’re “all above average.”

Companies’ boards say they rely on the pay benchmarks, which are based on surveys by consulting firms, as a way to set pay that is fair to both executives and the firm’s shareholders.

But companies often play games with the process in ways that are costly for shareholders, complained Vineeta Anand, chief research analyst with the AFL-CIO, a frequent critic of CEO pay levels.

They cherry-pick which companies go in the comparison groups, said Anand. And when one company gives pay raises, the benchmark pay for the whole group rises, she said.

“We think it’s ridiculous to base CEO pay on what the guy down the block gets,” Anand said.