Executive Salaries And What It Means To The United States

Executive Salaries and What it

Means to our Economy

Ryan Kenny

Professor Risinit

Old Saybrook

20 November 2006

The economy of the United States is by far the largest and most powerful economy in the entire world. The average family income is roughly $40,000 a year and our GDP (Gross Domestic Product) is well over 10 trillion dollars. The next closest country is Japan with 4 trillion dollars of total GDP.(Johnson & Wales: Economics) The United States has so many large corporations it takes someone to run each one and it also take a lot of money to pay someone to be in charge of each one.

Top companies in the United States range from automobile manufacturers to household appliance manufacturers to telecommunication companies. The largest company in the United States under the category of net income is Citigroup which is in the banking industry. The CEO of Citigroup is Charles O. Prince. In 2005 Charles O. Prince raked in $22,994,729 in total compensation including stock option grants from Citigroup. The average employee would have to work 459 years to equal Charles O. Prince's 2005 compensation.(AUM)

Other benefits that CEOs harvest range from country club memberships to yacht expenses. Mattress King Simmons Bedding covers up to $105,000 in annual costs for the crew on CEO Charles Eitel's yacht. Eitel, who earned $998,000 in salary and bonus, makes the yacht available for corporate functions 30 days a year. (USA Today) The extra perks that CEOs acquire are mind-boggling for the average person to fathom. The ones to blame unfortunately are ourselves. Over the years there could have been investor involvement to stop this inflation of executive pay from happening. Sadly it seems too late.

Boards of directors are responsible for setting CEO pay. Directors have awarded compensation packages that go well beyond what is required to attract and hold on to executives and have rewarded even poorly performing executives. These executive pay excesses come at the expense of shareholders as well as the company and its employees. Furthermore, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company. Excessive CEO pay is essentially a corporate governance problem. When CEOs have too much power in the boardroom, they are able to extract what economists' call "economic rents" from shareholders (Economic rent is distinct from economic profit, which is the difference between a firm's revenues and the opportunity cost of its inputs). The board of directors is supposed to protect shareholder interests and minimize these costs. At approximately two-thirds of US companies, the CEO sits as the board's chair. When one single person serves as both chair and CEO, it is impossible to objectively monitor and evaluate his or her own performance.

What can be done about this? The best thing that can happen to let shareholders know about CEO executive pay excesses is to let it come to light. Companies are required to file documents describing their executives' compensation with the U.S. Securities and Exchange Commission (SEC); these often are difficult for shareholders to understand. In recent CEO pay scandals, even boards of directors have claimed they were kept in the dark. As executive pay continues to spiral upward, the SEC is considering updating and improving its pay disclosure rules. Unless an executive compensation consultant is hired to crunch numbers, it is nearly impossible for investors to determine how much their executives are paid. The SEC is proposing new CEO pay disclosure rules since, the existing ones date back to 1992. This new idea would require companies to disclose executive compensation data in plain english. Also the SEC is requiring companies to show dollar to dollar estimates of their executive pension benefits.

In chapters 19 and 20 of our textbook it goes into detail about earnings & discrimination and income inequality & discrimination. The area in which my topic falls under would be income inequality. There are many factors that contribute to income inequality. Some examples would include a greater demand for highly skilled workers, demographic changes, international trade, immigration, and a decline in unionism.

An increase in demand for skilled employees has been one of the major factors contributing to income inequality. Firms are seeking highly skilled and well educated people and, with such a scarcity of this type employee, this invokes a bidding war which raises wages. Also