Government Regulation: Executive Compensation

               How much is too much? This is a question typically vocalized after the annoying friend of a friend cracks one too many racy jokes, or after you eat 5 too many slices of pizza attempting to get your money’s worth at an overpriced buffet. We have all experienced these situations, and have all experienced the affects of these situations, whether it is a feeling of discomfort or embarrassment, or both. Everyone has limits. If we didn’t, our culture as a whole would be tortured under the wrath of anarchy and uncontrollable debauchery. With the aforementioned logic, why are limits completely disregarded in terms of executive salaries and bonuses? I’ll take you inside the numbers, discuss reasons of how this could affect our lives, and offer a solution to this irrational problem.

                According to the United States Department of Labor, the average salary of a United States citizen in 2008 was 42,720 dollars. In the same study, chief executives earned an annual mean of 160,440 dollars. To the naive and unsuspecting eye, the gap between executive salaries and the average citizen’s earnings seems reasonable and respectable; However, these statistics take into consideration all of the CEOs and executives in the United States, including the owners of your typical “mom and pop” shops. Logically, small business owners earn less net income since their enterprise receives lower profits, which in return lowers the average salary of executives. I point this out because although the average salary is important, it’s not really at the center of the debate. More importantly, the emphasis of the debate should be focused on the top corporations of America, since these executives earned an average of 10.4 million dollars. As a specific example, Rex Tillerson, Chairman and CEO of Exxon Mobil, earned 16.7 million dollars in 2008. Furthermore, according to Jerry Goldberg, an individual who calculates the salaries and bonuses of the CEOs of the Fortune 500 companies, Rex Tillerson is expected to earn 22.4 million dollars in 2009. Is there any way someone can rationalize a 5.7 million dollar increase in salary in an economy like this?

                You may ask how does this really affect me? I’ll break it down simply in terms of the Exxon Mobil example. Rex Tillerson is expected to earn 22.4 million dollars this year, which directly comes from the profits the company earned in the current fiscal period. Profits are maximized by the increasing prices of crude oil, which are spurred on by speculators raising the price of the oil. The higher the profits, the more money the executive can receive in a salary or a bonus. We all personally understand that the money for gas is coming directly out of our pockets leaving us with less money for other important cash-demanding expenses. This is to say that executives at Exxon Mobil are capitalizing from increasing prices of crude oil. In essence, they are given the opportunity to get richer, while the average earners in the United States are getting poorer. Another way executive compensation is affecting the average American is through stock dividends. Simply put, if executives accept less in salary and bonuses, there would be more net income to distribute to stockholders. 

                Executive’s at large companies are typically paid a salary as well as receiving short-term incentives or bonuses. The incentives and bonuses section of an executive’s compensation is the most questioned form of compensation. The middle-class of the world question how much is too much? This question of opinion is difficult to answer. To give some credit to those receiving these high salaries and incredibly large bonuses, they do deserve more than most employees since they have to carry the largest burden of responsibility. This responsibility extends further than just the corporation itself. These corporations make up a great portion of our global economy; therefore they must be compensated to represent the risk they take by stepping into the executive position. With that said, bonuses and other incentives should be lowered. One solution to this problem would be setting up a system of government regulation. Corporations are required by law to disclose executive compensation. By doing this the government should step in and decide how much the executives of the largest corporations should earn. If the government notices that an executive is earning an exuberant amount of cash compensation from salary and bonuses, they should require the executive to give a portion back to the corporation. This is not to say that the government should set up a universal maximum salary. I feel that these measures would be counter-productive in terms of growing corporations. The measurement of regulation should be a reasonable percentage of net income.  

                I have brought up the debate about exuberant executive compensation, and how America should regulate this growing problem. I have also pointed out why this problem affects stakeholders and shareholders of corporations and why we should attempt to make a change to these policies. There are many ways to control this problem, but I believe government regulation would be the most effective. I hope you, as the reader, feel the same way.

Sources:

The United States Department of Labor

www.dol.gov/

The Fortunate 2500 List of the Fortune 500

http://jgfortunate2500list.com/2009home.html