Exec Comp 2012:  One CEO Equals . . . Everyone in Cleveland?!?

In 1989, the chief executives of the seven biggest banks in the country made about 100 times the income of the typical American household, on average. On the eve of the crisis in 2007, they made more than 500 times the median.

–Eduardo Porter, “The Modest Worth of Big Banks“; The New York Times (5/22/2012)

In an otherwise fine piece lambasting the too-big-to-fail banks and their obscenely overpaid, dice-throwing chiefs, I’m afraid that Mr. Porter has unwittingly given ammunition to bank defenders.

He does that by defining bankers’ pay relative to the average household’s income.

Changing the Denominator

Once upon a time, of course, CEO pay was defined as a multiple of what the lowliest employee — the proverbial janitor — made.

Also once upon a time — as late as the 1950’s — that ratio was a modest 30 : 1.

When that ratio started to gallop ahead in the 1990’s (to a rather gaudy 500 : 1), how did The Business Roundtable, The Conference Board and other CEO apologists react?

Not by acknowledging that executive compensation had (finally) gotten out of hand, but by taking a page from George Orwell and . . . redefining the benchmark.

So, beginning about a decade ago, CEO compensation curiously started being stated as a multiple of the average employee’s pay.


Instant multiple compression — even as CEO pay continued to skyrocket.

One More Time

Which leads to the next, seemingly inevitable chapter in the saga of outrageous CEO pay — namely, replacing the denominator yet again.

My suggestion:  don’t pick a yardstick — like average household income — that’s likely to need jettisoning in the near future.

Instead, pick something like “total annual pay of everyone in Cleveland.”

I can just see the headline now:  “CEO’s Annual Salary Expands From 5x to 10x Cleveland’s”

Sound farfetched?

Consider this:  with annual 2011 incomes of $3 – $4 billion apiece(!), the top hedge fund honchos individually made more than everyone in St. Paul, MN last year (I’m assuming St. Paul has 100,00 employed adults who made an average of $35,000 each).

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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