Excessive CEO Salaries: The Ultimate Irresponsibility, Research Paper Example

Abstract

In recent years, it has come to the public’s attention that many Chief Executive Officers (CEOs)  of United States business concerns have been, and still are, paid exorbitant annual salaries.   Additionally, these same CEOs typically receive extensive benefit packages, some of which rival the salaries in net worth.   In any ethically maintained business environment, outrageously large salaries are at best questionable; given the collapses and scandals of many of these businesses, the practice is virtually criminal.  The U.S. government, as it has traditionally stepped into the private sector to regulate business as needed, should be empowered to set definite limits on how much any company or corporation may compensate any of its officers, including the CEO.

Introduction

Few cases of how excessive salary paid to a CEO may backfire on a company are more blatant than that of the investment firm of Goldman Sachs.  In 2007, CEO Lloyd Blankfein was a media target; his reported salary of $74 million – not including extensive additional benefits – made the headlines as an example of grossly irresponsible corporate greed.  Goldman Sachs investors began to demand a vote in determining pay at this level, yet the Board of Directors supported the salary.  Given the company’s earnings, it amounted to less than one percent.  Blankfein, meanwhile, adopted something of a “let them eat cake” attitude and confidently told the unhappy investors that he did not wish anyone “less sophisticated” deciding upon his compensation (Raghavan, Forbes, 2008).

As was disclosed in 2010, the extraordinary success Goldman Sachs was achieving in that period was illusory, and massive investigations were undertaken to expose fraudulent, or at best negligent, practices in mortgage and stock manipulations.   It was uncovered that the Federal National Mortgage Association, or Fannie Mae, was aligned with Goldman Sachs in essentially investing a new kind of accounting, one which would indicate as tangible profits not realized.  Most astoundingly, even as the crisis worsened and Goldman Sachs executives faced prosecution on criminal charges, Blankein retained his vast income.  There are, as is well known, other corporations in similar circumstances, and this reflects an unconscionable irresponsibility on the part of both the CEOs and the companies so outrageously compensating them.  The savings and loan crises of the 1980s and 1990s demonstrated amply that ordinary citizens suffer greatly from corporate misconduct.   CEO salaries in the high millions, particularly during times of recession, must surely indicate some form of misconduct at play, and the national situation demands that the federal government impose ceilings on CEO compensation.

Current Salaries, Substantiations, and Controversies

Arguably, the most disturbing factor regarding Blankfein and the Goldman Sachs scenario is how ordinary the parameters of it are.   As of April, 2011, CNN  identified twenty CEOs earning similar salaries.  Viacom’s Philippe Dauman earns $84.5 million, Ray Irani of Occidental Petroleum is annually paid $76.1 million, and, somewhat down the list, Howard Schultz of the Starbucks corporation earns $21.7 million (CNN Money).   As may be expected, many CEOs who do not rank within this select grouping also receive extravagant compensation.

Given the numbers of highly-paid CEOs, it is not reasonable to conclude that exorbitant salaries automatically reflect dubious business practices and/or companies on the brink of disaster.  However, it is established that every modern scandal involving a major firm has this component within it.  Moreover, in every instance wherein disaster ensues from both a company’s failure and a CEO’s extremely high salary, certain elements are evident, and they are sadly predictable: “abuse of power, breach of ethics, undermining of honest accounting, deception of both public and private watchdog groups, and sometimes the willing cooperation of such groups” (Kochan, Schmalensee,  2003,  p. 26).   There is no mystery at the heart of these collapses, no matter how complicated the processes within them.  Simple, old-fashioned greed, and at extraordinary levels, is the active agent.

It is difficult to trace the collapse of even one large institution.  This is hardly surprising; the complexities of the financial dealings involved serve to make the machinations all the easier.  For example, the American International Group, Inc. (AIG) has been in and out of the headlines for over ten years, and never in a positive way.  The crisis reached a head in 2005, as the company admitted to “improper accounting” that added billions to its revenue sheets  (BusinessWeek, 2005).   This crisis within a premier financial institution, coming on the heels of the Lehman Brothers and Enron debacles, prompted the government to step in.   AIG was deemed “too big to fail”, and then Treasury Secretary Henry Paulsen orchestrated a government bail-out.  By 2010, however, AIG would make headlines again; emails were uncovered indicating that Timothy Geithner, Treasury Secretary in 2008, encouraged AIG to keep silent about certain uses it made of government money (Grunwald, 2010).  As of today, the situation remains a hopelessly tangled mess, both for what remains of AIG’s empire and the government.  What is most stunning in all of this, however, is that the company voted in 2009 to award bonuses totaling $165 million to chief executives, an action that triggered national outrage, as well as censure from the White House.   In a very real sense, the AIG disaster eclipsed the impact of the 2001 Enron scandal.

As noted, what enables large corporations to mishandle affairs is the element of complexity intrinsic to financial dealings.  This is why exposure often comes late.  However, there is no escaping the reality that, in the very brief span of a single decade, abuses of extraordinary scope have been revealed.   These corporations, guided by their CEOs, have wrought damage comparable to aftermaths of war.   The chain reactions are inevitable, as smaller businesses fail because the larger investor collapses, and the employees are jobless.  Moreover, the banks themselves, often deeply involved in the suspect transactions, are no longer in place to guarantee personal investments.  In a shocking violation of the founding principles of the country, something like royal excess and abuse has seriously crippled the nation’s well-being.  As with any monarchy, it is the king – or, in this case, CEO – who must bear the responsibility.

Necessary Action

If, as has been the case, the government operates under the theory that some companies must not be allowed to fail because the consequences would be too severe, it is established that the government directly involves itself, and taxpayer money, into the operations of these organizations.  That understood, it is past time for a more concrete means of overseeing these actions to be installed.  In business, the CEO is ultimately responsible for the company’s practices, and it is from the board of directors that the government must directly demand accountability.

This is a right the government has, irrespective of whether or not it is bailing out a firm, for the government’s chief obligation is to the people, and large corporations have vastly impacted on the people in negative ways through illegal maneuverings to promote self-interest.  The CEO is, at least technically, under the control of the board of directors: “In the aftermath of CEO compensation abuses, how the boards treats and oversees the CEO tells the public how the board is managing the public’s money” (Lowy, 2003,  p. 41).  The government must go to the boards, for the CEOs are only as empowered and compensated as the boards dictate.  It should be legislated that any company with financial dealings above a certain, established figure – a “danger zone”, so to speak – must directly and consistently report to a federal agency set in place to ensure integrity and accountability.  Moreover, it must be established that no CEO salary exceed a reasonable figure, one based only on executive pay scales for the firm.

This is by no means a strategy to impoverish CEOS.  There is an easy way to ensure that truly effective CEOs, who drive company earnings to high levels, are compensated in proportion to their achievement.  Provided that a keen eye is maintained on the integrity of the business being transacted, the obvious means to reward CEOs is through stock options and value.  The CEO who advances the company creates a company with more valuable stock, and this exponential ratio, clearly reflecting the success under the CEO, serves to safely and sanely compensate him or her (Mandel, 2004,  p. 123).

Conclusion

As recent history has so irrefutably demonstrated, there is a distinct correlation between exorbitantly paid CEOs and corporations which face ruin through unethical and/or illegal activities.  The government must see, as is already apparent to the average person, an annual salary running to the high millions is inherently suspect; even the most successful business relies on a more even keel than such a top-heavy profit ratio indicates, and the more probable reason for such astronomical compensations is the time-honored one of greed.  Company after company has been destroyed by it, with massive repercussions to the people.  Company profits in the billions, particularly in the economic downturns of recent years,  point to some form of misconduct at play, and this situation demands that the federal government impose ceilings on CEO salaries.

References

Bloomberg Businessweek. (April, 2005). AIG: What Went Wrong. Businessweek.com. Retrieved June 2, 2011, from  http://www.businessweek.com/magazine/content/05_15/b3928042_mz011.htm

CNN Money. (April, 2011.)  20 Highest-Paid CEOs.  Retrieved June 2, 2011, from  http://money.cnn.com/galleries/2011/news/1104/gallery.top_ceo_pay/index.html

Grunwald, M. (January 15, 2010.)  Geithner Gets a Bad Rap in the AIG Scandal. Time. Retrieved June 2, 2011, from http://www.time.com/time/business/article/0,8599,1953864,00.html

Kochan, T. A., & Schmalensee, R.  (2003.)  Management: Inventing and Delivering Its Future. Cambridge, MA: MIT Press.

Lowy, M. (2003.)  Corporate Governance for Public Company Directors. New York, NY: Aspen Publishers.

Mandel, M. J.  (2004.)  Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better Than You Think.  New York, NY: HarperCollins.

Raghavan, A. (2008.)  CEO Compensation: A $74 Million Bargain. Forbes.  Retrieved June 2, 2011, from http://www.forbes.com/2008/04/30/blankfein-pay-goldman-lead-bestbosses08-cx_ar_0430blankfein.html