The ratio of the pay of corporate chief executive officers (CEO) to ordinary workers has exploded in the last 40 years. It was a bit over 20 to 1 at the start of the 1970s, now it is well over 200 to 1, and in good years for CEOs, it can be more than 300 to 1. Steven Clifford’s book, The CEO Pay Machine (Blue Rider Press) is an effort to explain how this happened and what we can do about it.
Clifford speaks from firsthand experience, having spent 13 years as a CEO of major corporations and having subsequently sat on more than a dozen corporate boards. Clifford makes it clear at the onset that he deplores the run-up in CEO pay, but he is trying to explain why it happened.
Clifford’s basic story is that the process that determines pay has become hopelessly corrupted. At the most basic level, the corporate boards that are supposed to represent shareholders and put a check on CEO pay have little interest in doing so. Clifford describes a process of whereby boards are captured by CEOs and other top management. Being a board member is a cushy job, typically paying well over $100,000 a year for around 150 hours of work a year, by Clifford’s calculation. With many boards paying $300,000 or $400,000 a year, the pay can be in the range of $3,000 an hour.
And, as Clifford notes, it is almost impossible to get fired from a board by shareholders. More than 99 percent of the directors who are nominated by the board for reappointment win their election. Furthermore, the boards are typically used to working with the CEOs. The CEOs and their staff are the ones who provide them with information. Often the CEO himself is a board member, usually the chair.
In this context, board members have little reason or incentive to ever challenge CEO pay. After all, the CEO is their friend, why would anyone object to giving their friend more money at the expense of a diverse group of shareholders, the vast majority of whom the director does not know. Furthermore, what difference would a few extra dollars make to the typical shareholder, if this is what it takes to add a few million to the CEOs pay?