Well-Paid CEOs Enrich U.S.; With 5% of World's Population, USA Home to Half of Largest Companies

Politicians are in a tizzy over how much corporate leaders make--about $8 million this year for CEOs of S&P 500 companies, according to the Financial Times. Rep. Barney Frank, D-Mass., has even introduced a bill titled "The Protection Against Executive Compensation Abuse Act.

Resident Fellow James K. Glassman
Resident Fellow James K. Glassman
"Yes, CEO pay--including the record bonuses paid this year to heads of Wall Street firms such as Morgan Stanley and Goldman Sachs--is attention-grabbing and has increased sixfold over the past 25 years. But, as economists Xavier Gabaix of MIT and Augustin Landier of NYU concluded in a study in July, that increase "can be fully attributed to the sixfold increase in market capitalization of large U.S. companies during that period." CEOs get paid more because they run bigger, more valuable companies.

Critics, notably Lucian Bebchuk of Harvard, argue that corporate boards are held captive by CEOs, who essentially dictate their own pay. Actually, though, rising pay has coincided with a trend toward more powerful and independent boards.

Kevin J. Murphy and Jan Zabojnik of the University of Southern California offer a more sensible explanation: Our new global high-tech economy, companies are less likely to promote insiders who may be chummy with the board and instead pick CEOs outside not just the firm but even the sector--take Alan Mulally, who came to Ford from Boeing.

These talented generalists are scarce and can have a huge effect on profits. Sure, they command high pay. Too high? The Yankees' Alex Rodriguez earned $29 million from June 2005 to this summer. Jeff Immelt of General Electric makes less than Dr. Phil does. If a good CEO can boost profits by $200 million, he's easily worth $10 million, or more.

Certainly, some CEOs, like some ballplayers, make more than they deserve. Angry shareholders have a remedy--dump the stock. The bigger problem, as we show in The American, the magazine I edit, is that publicly traded companies--because of pressure from politicians, the media and unions--could be underpaying CEOs. The best and brightest managers are migrating to private-equity firms, hedge funds and privately owned businesses out of the spotlight.

With 5% of the world's population, the USA is home to half the world's largest companies. Our system of compensating CEOs has served the nation well. Let's not let politicians mangle it.

James K. Glassman is a resident scholar at AEI and editor in chief of The American.

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About the Author

 

James K.
Glassman
  • James K. Glassman is a visiting fellow at the American Enterprise Institute (AEI), where he works on Internet and communications policy in the new AEI Center for Internet, Communications, and Technology Policy.

    A scholar, diplomat, and journalist, Glassman rejoins AEI after having served as under secretary of state for public diplomacy and public affairs, during which time he led America’s public diplomacy outreach and inaugurated the use of new Internet technology in these efforts, an approach he christened “public diplomacy 2.0.” He was also chairman of the Broadcasting Board of Governors, the independent federal agency that oversees all US government nonmilitary international broadcasting. Most recently, Glassman was instrumental in the creation of the George W. Bush Institute, where he remains the founding executive director.

    Before his government service, Glassman was a senior fellow at AEI, where he specialized in economics and technology and founded The American, AEI’s magazine, which he led as editor-in-chief until his departure from AEI in 2007.

    In addition to his government service, Glassman was a former president of The Atlantic, publisher of The New Republic, executive vice president of US News & World Report, and editor-in-chief and co-owner of Roll Call. As a columnist for The Washington Post, Glassman wrote about political and economic issues. He was also the host of CNN’s “Capital Gang Sunday” and of PBS’s “TechnoPolitics.” In 2000, he cofounded TCS, a technology and policy website. His most recent book is “The Secret Code of the Superior Investor” (Crown Forum).


    Glassman has a B.A. in government from Harvard College where he was a managing editor of The Crimson.


     

  • Email: jim.glassman@aei.org

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