Recent headline: Jobs Data Brighten U.S. Economic Outlook. The Labor Department reported 244,000 jobs were added in April, above expectations given March’s gain (221,000), but unemployment crept up to 9.0% from 8.8%. I am confused, especially when I examine the disparity in corporate compensation (a.k.a. The Wide Gap).
Occupants of the corner offices are rolling in dough again. After experiencing shrinkage during the recession, according to a study of 200 major companies conducted for the New York Times by a compensation consulting firm, the median pay for the top executives was $9.6 million. This represents a 12 percent increase over 2009 for chief executives. Actually, U.S. businesses are swimming in cash which I first addressed in my January post Shift Happens. In the fourth quarter of 2010 profits were up 29.2 percent, the fastest growth in 60 years – U.S. businesses reported profit at an annual rate of $1.68 trillion.
Consequently why the paradox? The recovery has not trickled down. Unemployment remains high and those that are gainfully employed are still struggling to hang on to their homes and jobs. Recent efforts under the Dodd-Frank financial regulations that empower shareholders has done little to curtail top executive compensation. Leading analysts doubt we will witness any major changes in the near future during proxy season as long as the market continues to perform.
I understand that executives of the corner offices assume the burden of responsibility for making their company successful for their employees, shareholders, customers, suppliers, etc. However, recently I learned that the IPS (Institute for Policy Studies) reported that leading corporations pay their top executives 300 plus times more than what the average American earns. I remember reading Peter Drucker, the father of modern management science indicating that companies should not compensate at more than 20 to 25 times what their workers receive. He believed that widening the gap beyond that would make it difficult to foster the teamwork needed to make a company successful. A controversial stance, but he firmly believed corporate leaders should do what is right for their enterprise first, not for their shareholders alone, and certainly not for themselves. To quote Drucker: “When CEOs pocket huge sums while laying off workers, that kind of action is morally unforgiveable.”
The reality is executive pay packages are soaring and we will continue to experience the Wide Gap. This morning’s query: If we were to put a ceiling on the corner office compensation, say 50 times, twice the rate Drucker proposed, how many more jobs could efficiently be added into the system? What do you think?