"If Corporate America is serious about reforming itself, CEO pay remains the acid test... The results aren't encouraging." Warren Buffett wrote this in a 2004 letter to shareholders following the Annual General Meeting of his company Berkshire Hathaway (NYSE: BRK.A), where he criticized the selection process of large companies to determine executive compensation. Renowned Austrian management guru Peter Drucker wrote in 1977 that a company CEO should not make more than 25 times the average salary of its employees, citing potential for resentment and falling morale among the workforce. Mr. Drucker revised his figure in 1984 down to 20:1 and though quite logical, it seems to have had very little impact on pay packages. In 2014 according to the Bureau of Labor Statistics the average production worker earned around $36,000 where a company's CEO was making more than their median worker at a staggering rate of 373:1, up from 331:1 in 2013. For the sake of comparison that ratio was only 46:1 in 1983. Data collected by the Economic Policy Institute shows from 1978 to 2014 CEO compensation at the 350 largest companies, by revenue, ballooned by 997%, an absolutely astronomical difference compared to a 10.9% increase for non supervisory employees in the same period. Warren Buffett criticized the behavior leading to these extravagant executive packages which has resulted in an "epidemic of greed".
According to the Bloomberg Pay Index, which ranks the highest paid US executives, Nick Woodman CEO of GoPro (NASDAQ: GPRO) took the top spot of 2014 with an estimated $285 million in compensation follow by Liberty Global Plc (NASDAQ: LBTYA) CEO Michael Fries at $140 million. With a list that includes Tesla (NASDAQ: TSLA) Chairman and CEO Elon Musk at $102 million and Google's (NASDAQ: GOOG) Chief Business Officer Omid Kordestani at $98 million for 2014, there are a variety of industries represented and they all appear to have very competitive compensation packages to offer. In fact, at $36 million the finance industry was #3 behind consumer discretionary, $48.6 million, and information technology, $41 million, companies respectively, on the list of industries with highest average executive compensation.
Earlier in February, Google CEO Sundar Pichai received the company's largest ever executive award of a $199 million stock grant, over 273,000 shares which will be given quarterly thru 2019. For comparison Apple (NASDAQ: AAPL) awarded Tim Cook $378 million when he became CEO after Steve Jobs in 2011. Alphabet recently overtook Apple as the highest valued company in the world and it seems they are rewarding Pichai who took over the post in August after the company restructured from Google into Alphabet. Reporting revenue of almost $75 billion and net income of $15.2 billion in 2015 this seems like a drop in the bucket for the world's biggest company. In an ever expanding market where everything seems to be value driven, it is becoming more difficult for companies to retain top tier talent. With the US on the border of a bear market and the global economy in turmoil, it may be necessary for companies to reevaluate the way they pay.
CEO and other executive pay for publicly traded companies are decided upon by the company Board of Directors which normally assigns a compensation committee to create these pay packages. The NYSE and NASDAQ require that a company's compensation committee may be comprised only of independent board members due to the significant impact their decisions may have on a company and subsequently the market. These committees choose "peer" companies to compare themselves to and offer compensation comparable to their respective industries, which as of 2006 must be disclosed per Securities and Exchange Commission (SEC) regulations. However, the "peer" companies chosen are generally larger, in some cases over twice the size in terms of revenue or market capitalization, and seem to serve as a means to continue supporting the system in place. In 2011 the SEC furthered their requirements by instructing companies to hold a non binding vote for their shareholders. Aflac Chairman and CEO Dan Amos elaborated on the rule stating that, "Our shareholders, as owners of the company, have the right to know how executive compensation works." While it would be nice to believe that every voice will be heard, at the end of the day the decision still lies with the Board of Directors. In an age of increasing transparency it should be harder for companies to rationalize these payment packages. An August 2015 approval of a new SEC rule takes aim at the issue by forcing companies to include in their financial statements the ratio of CEO pay to the median pay of their employees, which is the middle of the pay scale not the average. New Jersey Senator (D) Robert Menendez, a proponent of the rule, explained how there are "middle-class Americans who have gone years without seeing a pay raise, while CEO pay is soaring." Companies were quick to combat the decision claiming the cost to them would be harmful and could cause problems with investors who do not understand how pay is calculated. Columbia University Law Professor Robert Jackson Jr. acknowledges it will cost a pretty penny, but can also provide a company and its investors with a "more systematic understanding of what their employees earn."
French economist Thomas Piketty set the world on fire in 2013 with his book "Capital in the Twenty First Century" where he chronicled the income inequality in Europe and the US since the 18th century. This publication sparked a global outrage and started important conversations the world over about the widening gap between the rich and the poor. The wealthiest family in the United States, Wal Mart (NYSE: WMT) heirs the Waltons, have a combined wealth of $170 billion which is greater than 43% of US families combined. Great divides between the 1% and the 99% along with company CEOs and their employees are causing a great deal of grief. Piketty claimed in 2013 that the "system is pretty much out of control." He appears to be right and we must work fast to fix it while there is still enough to go around.