by From Dean Baker CEOs and other top management in the U.S. are far more highly paid than their counterparts in Europe and Asia. NYT columnist Jeff Sommer had an entertaining piece on how many of the business leaders who eagerly embraced DEI a few years back are now being very quick to abandon it. This is not terribly surprising to those of us who never took the commitment to DEI very seriously, but there is an important aspect to his discussion that he leaves out. Sommer spends much of the piece on the views Milton Friedman expressed in an article more than half a century ago. In that article, Friedman said that it is the job of corporate executives to maximize profit, not to try to do things they consider good for society. While it is foolish to imagine that corporations will ever be
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from Dean Baker
CEOs and other top management in the U.S. are far more highly paid
than their counterparts in Europe and Asia.
NYT columnist Jeff Sommer had an entertaining piece on how many of the business leaders who eagerly embraced DEI a few years back are now being very quick to abandon it. This is not terribly surprising to those of us who never took the commitment to DEI very seriously, but there is an important aspect to his discussion that he leaves out.
Sommer spends much of the piece on the views Milton Friedman expressed in an article more than half a century ago. In that article, Friedman said that it is the job of corporate executives to maximize profit, not to try to do things they consider good for society. While it is foolish to imagine that corporations will ever be leading the charge for a better society there are two issues that are worth raising about Friedman’s moral imperative for CEOs to maximize profit.
The first is that maximizing profit may often involve actions that look to be for the public good. It is very common for a major employer in a city or town to support a little league baseball team or a library or some other institution. This is not directly adding to their profits, but it could buy goodwill that will benefit the company in tax or zoning issues or other matters. Presumably this would win the Milton Friedman seal of approval.
This can also extend to larger social issues. A consumer products company, like GM, that had a small operation in Apartheid South Africa, may buy more in favorable publicity, and therefore sales, from leaving South Africa, than it stood to gain in profits by continuing to operate there. This could apply in a number of areas where there is a major political movement, for example global warming.
An honest version of Milton Friedman presumably would agree that a profit-maximizing company should do what might be considered good in the world, if it also could lead to increased sales and profits. A less honest version might insist that the company not make the profit-maximizing choice, because he disagreed with the policies. (In other words, he actually liked Apartheid and global warming.)
This is an important point, which Sommer talked about when discussing efforts by Saul Alinsky and Ralph Nader to change corporate behavior. But there is another issue about profit maximization that Sommer skips over.
When discussing Alinksy’s efforts to change corporate behavior, he quotes him as saying:
“Boards of directors are only rubber stamps of management.”
This is an incredibly important and under-appreciated point. In the textbook version of capitalism, the corporate boards work for shareholders and police top management in the same way that management polices assembly line or clerical workers. They make sure that the company gets the most work out of management possible, for the least pay.
However, that is not the way corporations actually work. As a practical matter, as Alinsky said, corporate boards are largely controlled by top management and generally defer to their wishes. That is true not only when it comes to business strategy, but also when it comes to matters like CEO pay.
It is probably very rare that corporate directors ask questions like, “can we pay our CEO 20 percent less?” or “can we get another CEO who is just as good for half the pay?” This is because they have no incentive to ask these sorts of questions.
Being a corporate director is a very good-paying gig. Directors of major companies can get several hundred thousand dollars a year for a few hundred hours of work. If they get the job, they typically want to keep it. And the best way to keep the job is to not piss off your fellow directors. Directors that are nominated for re-elections by their board win shareholder approval well over 99 percent of the time. This means that if a director wants to stay on the board, they don’t raise pesky questions about whether top management is overpaid.
A result of this structure is that CEOs and other top management in the U.S. are far more highly paid than their counterparts in Europe and Asia. This is very clear if we compare CEO pay at the U.S. Big Three automakers with their counterparts in Europe and Asia.
As of the fall of 2023, the CEOs of Ford, Stellantis, and GM earned $21 million, $25 million, and $29 million, respectively. The CEO of Mercedes earned $7.5 million, while the CEO of BMW earned $5.6 million. The gap was even larger if we look to Asia. The CEO of Toyota earned $6.7 million, while the CEO of Honda earned $2.3 million.
These are all large successful companies, certainly comparable to our Big Three, yet they are able to pay their CEOs far less than our companies. This is due to a different corporate governance structure where there actually are people imposing checks on CEO pay.
The story gets even worse. Let’s look at Boeing, a company that has not fared well in recent years. It has been consistently losing money over the last five years. Its stock price has gone nowhere even as the overall market has doubled during this period.
If CEO pay was closely tied to return to shareholders, we would expect that Boeing’s CEO isn’t making much money, but we would be wrong. Boeings’ CEO is getting $32.8 million this year. An earlier CEO, who allowed for the safety failures that lead to two disastrous plane crashes, walked away with $62 million. If these CEOs were maximizing returns to shareholders, it is difficult to see how.
It’s important to realize that this is not a problem of just a small number of CEOs getting too much money. If the CEO is getting $30 million, then the chief financial officer is likely getting close to $15 million, and the other members of the C-suite are likely all getting over $10 million. The next tier of executives are probably getting pay packages in the low millions. It would be a very different world if the CEOs were getting $2.3 million, like Honda’s CEO.
The outlandish pay for CEOs distorts the pay structure of the economy. It leads to a situation where even university presidents or heads of large non-profits can be getting several million dollars a year. Other top administrators can also be earning near $1 million a year. And according to advanced economic theory, more money going to the top means less money for everyone else.
The basic point here is that it is a serious mistake to think that companies are being run to maximize shareholder value. The people who control corporations are the top managers. And if we put on our Milton Friedman thinking hat for a moment, we would reasonably conclude that managers run the corporation in their own interest.
This doesn’t mean that they don’t care about returns to shareholders. They have to provide decent returns, or they risk getting fired. This is just like paying workers competitive wages. If a company doesn’t pay roughly the market wage for their workers, it won’t be able to hire anyone. But the pay is not because they care about their workers, it is what they have to do to keep the company in business. The same story applies to returns to shareholders.
If we recognize this point, we can see that there is a lot of money on the table in the form of the excess pay that CEOs and other top executives skim from their companies. If we could reorganize corporate governance to allow investors more control (hey, the rules are set by the government, they are not given by the market), as in Europe and Asia, there would be a lot more money for the rest of us.