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International Issues - The Big Boss Burst

C O M P E N S A T I O N : A M E R I C A N   C E O S

The Big Boss Burst
The CEO compensation in the US has skewed the global economics.

   It all started with Eugene Grace, when he earned a performance-based cash bonus of $1.6 million (equivalent to $17.3 million in today’s purchasing power), as the President of Bethlehem Steel way back in 1929. And with this evolved in the US the lethal idea of linking CEOs compensation to the performance of the companies they run. This unshackled the dying penchant of American executives for ‘performance’ in terms of maximising revenues, profitability and shareholders’ wealth, which manifested in form of unflinching gluttony creating havoc and distortions all around, so much so that over the past decade, the CEO’s compensation in the US had gone up by a whopping 300%, whereas stock prices (S&P 500), corporate profits, worker pay scales and inflation had gone up by 237%, 144%, 48% and 41% respectively. As per Economic Policy Institute (EPI), in 2005, the average compensation of the CEO of a $1 billion (in revenues) company amassed $10.9 million, i.e. almost 262 times (it is 25 times in case of other industrialised nations) what the average worker in the same/similar company made. Between 2000-05, the median CEO pay shot up by a whopping 84% (EPI), whereas for workers, it plummeted by almost 0.3% (BLS weekly earnings data)
Bigger CEOs of even bigger companies have been even bigger distorters. To quote a few, William McGuire of UnitedHealth Group amassed one of the largest stock option valued at a mind boggling $1.6 billion, ExxonMobil's CEO, Lee Raymond's post retirement pay check of $144,000-a-day, Pfizer CEO, Hank McKinnell's post retirement sop of $6.5 million a year, and Ray Irani, CEO of Occidental making nearly $173,000 a day, which effectively means $120 per minute in 2005.

Moreover, to further augment their compensation (in form of cash, bonuses, incentives or even personal security services), CEOs more than often have created mammoth and inefficient conglomerates. They blatantly manipulated reported profits to sustain stock prices. Enron epitomised illegal methods and unethical practices. Similarly, companies like Delphi, OfficeMax, Qwest and WorldCom that showered big performance-based bonuses on their bosses before accounting frauds were discovered. There are some surveys which state that executives have gone to the extent of cutting down advertising and R&D expenditures by almost 80% to achieve targeted profits. It does not end there. They have been shamelessly making fortunes even when the companies have been losing. Merck stock went down by almost 28% when it had to pull out Vioxx from the market - but CEO Ray Gilmartin mopped $37.8 million as compensation and he also received a new grant of 250,000 stock options. Fannie Mae's CEO, Franklin Raines, raked in $52 million from 1999 to 2003. It was later realised that there had been accounting irregularities, plunging the stocks by almost 20% in 2004.

If compensation was linked to performance to instill competence within CEOs and competition being imperative for healthy sustenance of business, then why does America Inc. look so terribly distorted today and to what extent these abnormally compensated CEOs would rationalise the irrationalities and distort it further, holding every stakeholder of the American economy at ransom?

Until and unless this totalitarian CEO syndrome is demolished, distortions would inevitably aggravate and further creep into other nations through the veins of globalisation, causing unprecedented damage. And this syndrome can only be decimated by increased accountability brought about by shareholders' empowerment and stringent regulations to enforce transparency and probity in corporate governance.

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