The Wall Street Journal came out with its annual survey of CEO compensation last week. To absolutely no one’s surprise, CEO compensation is up again. In 2013 the median pay for CEOs at 300 companies with revenue of more than $8.7 billion was $11.4 million, up 5.5 percent from 2012. This means that the gap in pay between CEOs and employees is continuing to grow, as average hourly compensation rose just over 2.0 percent during the same period, roughly keeping pace with inflation.
For those concerned about inequality, the continued rise in CEO pay is bad news, but defenders of these eight-figure paychecks are quick to say that this is just the workings of the free market. In that story, CEOs are getting paid what they are worth. Companies are willing to pay the median CEO $11.4 million because they add that much to the bottom line. The same holds for the real high-end earners such as Larry Ellison, who pocketed $76.9 million from his stock options at Oracle, and Leslie Moonves, who received $65.4 million in compensation from CBS. The argument is that these CEOs produce far more for the company than the person next in line if they were to leave.
Under an honest free market story of CEO pay, corporate boards of directors would constantly analyze compensation packages. The boards would act to ensure that CEOs are paid in line with what they contribute to the company and not a penny more. Corporate directors would also look to see if there might not be potential CEOs who are willing to work for less, not just at other companies but in other countries. If there is a CEO is Germany, Japan or China who could do the job as well and cost shareholders a few million less, the directors would rush to make the hire.
Yes, that is the way the market for CEOs is supposed to work. But we got yet more evidence that the market for CEOs doesn’t work anything like this last month. It turns out that the CEO and other top executives at Coca-Cola have been giving themselves lavish bonus packages. According to the calculations of investment adviser David Winter, the bonuses issued last year had a value of $13 billion, which could rise to $24 billion over a two-year period. These bonuses would be shared among 6,000 managers, coming to an average $2 million per person per year.
This is a considerable chunk of money, even for Coca-Cola. With profits of about $9 billion a year, these bonuses are comparable in size to the company’s profits. In other words, they should be of real concern to its shareholders, since there is enough money at stake to hugely affect their earnings from the company.
This is why David Winter was happy that Warren Buffett, through his company Berkshire Hathaway, is one of the largest owners of Coke stock. Buffett has publicly condemned excessive CEO pay on many occasions. For this reason, Winter assumed that Buffett would be supportive of his effort to clamp down on the pay packages that the top management at Coca-Cola had awarded itself.
Winter was wrong. Buffett apparently decided that he did not want to have a public spat with Coke’s management. He indicated that he was raising the issue privately with the management and would presumably persuade them to reduce the size of future bonuses. But this meant that they would effectively get away with stealing billions of dollars from Coke by getting pay that was so large relative to total profits than there’s no way their performance could justify it.
This episode is striking because if there was ever a company where it should have been possible to rein in excessive CEO pay, it was Coca-Cola. In most companies, stock ownership is diffuse, so there is no single person who controls as large a share of stock as Buffet does with Coke. Furthermore, Buffett sees excessive CEO pay as a problem, so he should presumably have been more willing to take steps to limit compensation than most investors, who don’t seem to have the issue on their radar.
Yet when given the opportunity to take a strong stand against a pay package that he viewed as excessive, he did not want to have a public fight. Unfortunately, concerns over bad publicity never seem to be an issue for him when the topic is large-scale layoffs or shipping jobs to other countries. It is only the publicity around excessive pay of top management that Buffett felt the need to avoid.
This is a case where of not just wealthy stockholders being ripped off by wealthy CEOs and other top management. Much of Coke’s stock is held by middle-class people through 401(k)s and pension funds. These people lose when top management rips off the company.
But pay for top managers in corporate America also has a spillover effect in other sectors. As a result of the exorbitant pay going to CEOs, top management at universities, hospitals and even charities can count on pay packages that run into the high six figures and even seven figures. Their top assistants have their pay scaled accordingly. In other words, excessive CEO pay is a big part of the story of growing inequality that we’ve seen over the last three decades.
In this sense, Warren Buffett may have inadvertently done a major service to the public. He showed clearly that even under circumstances in which we would least expect it, CEOs can still write themselves exorbitant paychecks and get away with it.