Whatever you might think about the now-bollixed contract negotiations between the Washington Nationals and Jim Riggleman, it is a textbook example of an arms-length bargaining process between an employee looking to get the best job at the highest salary and a company looking to get the best manager at the lowest price.
In that respect, it bears no resemblance to the way big corporations go about negotiating a contract with a top executive. In most cases, boards of directors decide who they want and convey their decision to the lucky candidate or the executive whose contract is up for renewal. It’s only then, after the company has essentially given away its bargaining leverage, that the salary negotiation begins. Seizing his advantage, the executive asks for an outrageous pay package and after some gentle shadow boxing agrees to accept something slightly less.
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
So begins the escalation of chief executive pay.
The data from this spring’s proxy season is mostly in and it shows that after two years of decline, the average compensation for chief executives of the 500 largest U.S. corporations is on the rise again. According to Governance Metrics International, the average “total realized compensation” (salary, bonus and benefits plus any value realized from the exercise of stock options and vesting of stock grants and retirement benefits) was just under $12 million in 2010, up 18 percent from 2009 but still below the $15 million peak in 2007.
If you believe, as the corporate crowd apparently does, that this market for corporate talent is competitive and efficient, then you must also believe two things: First, that none of these guys (and the vast majority still are guys) would do the same job for a nickel less. Second, that the value of the chief executive went up 18 percent last year while the value of average workers in their companies changed very little. And if you believe that you are a fool and an ideal candidate for an open seat on an S&P company board of directors.
We’ve been having this argument about executive pay for 30 years, and we’re still pretty much where we began: Executives think the market has affirmed that they are worth every penny of what they get, and the rest of us think they’re grossly overpaid.
By my lights, the best academic work on this subject has been done by two law school professors, Lucian Bebchuk and Jesse Fried at Harvard, who unlike most finance professors understand that the market for executive compensation is essentially rigged. Their studies have found that the top five executives capture about 10 percent of the net profits of large public companies, up from about 5 percent in the early 1990s, which means that it has a material effect on shareholders. More significantly, they have run the numbers and found that chief executive pay correlates negatively with the profitability and market valuation relative to book value. Put more simply, the firms with high CEO pay turn out not to be the best performers.
Despite this compelling evidence, and the unambiguous public outrage, all the attempts to correct the excessiveness of executive compensation have pretty much made things worse or failed.