Today, the Wall Street Journal’s headline, “Behind Soaring Executive Pay, Decades of Failed Restraints,” highlights the still ever growing disproportional amount CEO’s are compensated compared to their own lieutenants. According to Mr. Kevin Murphy, a professor at the University of Southern California’s Marshall School of Business, the average CEO compensation last year was $10.5 million. “Mr. Murphy calculates that the average CEO pay was 369 times as much as the average earned by a worker last year, compared with 131 times in 1993 and 36 times in 1976. Meanwhile, the average U.S. paycheck has barely kept ahead of inflation in recent years.”
Interestingly, amplified CEO compensation didn’t start until the early 1980s. Cultural changes in compensation from the more egalitarian societal values and punitively high marginal tax rates began after a decade long bear market soured executives on stock and stock options. The 1980’s brought a rise in signing bonuses and guaranteed bonuses as well as “golden parachutes,” sizable sums promised when the company was taken over, encouraged by corporate “boards worried that executives might oppose a deal that was good for shareholders out of concern for their own futures.”
The Wall Street Journal summarizes a detailed history attributing the meteoric rise of executive compensation to the efforts of critical compensation activists.
Now, I’ll be the first to commend CEOs for negotiating strong compensation packages. It’s the corporate boards and the stockholders who enable exorbitant and seemingly unjustified compensation packages. What is interesting is the amazing number of stock option “backdating” scandals that have surfaced. According to the Wall Street Journal, “More than a 100 companies are under scrutiny for manipulating the timing of option grants to generate even bigger gains for executives.”
Often, the word “pyramid” is used to describe the way Direct Selling associates or Network Marketers are compensated. Certainly legal, the network marketing business model, often unfairly, is slandered with the “pyramid scheme” charge. Pyramid schemes were brought to the public’s attention after the rise and fall of Charles Ponzi devised an investment company buying selling postal reply coupons around 1918. By definition, a pyramid scheme is when money is exchanged without the exchange of goods or services and is subject to collapse as the members at the top are compensated unequally to the subsequent members.
If a “scheme" is illegal and "pyramid” suggests the people at the top get all the money and the people toward the bottom have no hope in getting to the top, then what’s corporate executive compensation?