David Leonhardt sought to make amends for some of his recent columns by posing a very simple question, if corporate CEOs face a normal market, how come they never end up quitting jobs because of a pay dispute? He points out that the cases of CEOs just quitting for another job, as opposed to retiring or being dumped, are few and far between. The obvious explanation for this is that CEOs don't face a real market. For the most part, they are negotiating with their friends and business associates, who don't have any real interest in holding down CEO pay. This would seem to be a clear failing of the rules of corporate governance. Basically, they do not give shareholders enough power to effectively place a limit on the pay of top executives. The libertarians who want to run for cover at this point in the discussion have missed the boat. Corporations are a creation of the government. A corporation is a legal entity that the state allows individuals to establish in order to advance a social purpose -- increasing wealth. The government already sets all sorts of rules for corporate governance, the issue here is simply getting the rules right. In the Conservative Nanny State, I discuss this issue briefly. My three quick items are: 1) requiring compensation packages for top executives to be put to a vote of shareholders at regular intervals; 2) don't allow the CEOs to count non-returned ballots as supporting management's position; and 3) explicitly allow shareholder suits against corporate boards who are negligent in exercising their responsibility to limit the pay of top executives to market levels. These measures should go far toward bringing CEO pay down to earth. This is important not just to prevent the taking of money that could otherwise go to workers and shareholders, but also because excessive CEO pay infects pay scales throughout the economy. Presidents of universities can now command salaries in excess of $1 million a year, and even the top executives at charities and non-profits often get pay that runs into the high six figures. We need a real market for CEOs.
--Dean Baker