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Dear Dr. Dollar:

Why do companies compensate CEOs with such high salaries and bonuses? Do the CEOs themselves decide on their pay? Isn't it always said that no one is indispensable?
—Gwen Nottingham, Laurel, Montana

This article is from the November/December 1998 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org

This article is from the November/December 1998 issue of Dollars & Sense magazine.

issue 220 cover

CEOs and other top executives of large corporations do not formally decide on their own salaries—that’s the job of the board of directors. The board members, however, are generally high level executives of other corporations, who by supporting the big pay packages of others, win support for big pay packages for themselves.

For example, top executives of industrial companies with over $250 million in sales were compensated an averge of $870,000 in 1997, according to Forbes. Consider Frank Newman, who runs Bankers Trust, one of the banks that fueled the current crisis in Asia with ill-conceived loans. His 1997 salary and bonuses added up to $10.9 million. Or Harvey Golub, who oversaw the layoffs of 3,300 workers from American Express in 1997, and was compensated $33.4 million—that’s about $10,000 for each layoff.

Yet the huge salaries are not only a result of executives taking good care of each other. Other countries also have “interlocking directorates” of top executives serving on other companies’ boards, yet CEO salaries are not nearly so high as in the United States. Top executives in Canada, Japan, the United Kingdom, and Germany are paid only half as much as their U.S. peers (with pay including salaries, bonuses, perks, and long-term incentives). You can find individual executives in those countries who take home millions, but nowhere do top executives as a group come close to the U.S. corporate elite. So what’s the difference? Are U.S. executives more valuable than European or Japanese executives in producing profits? The answer lies not in their productivity, but in their power.

Over many decades, U.S. companies have created a highly unequal corporate structure that relies heavily on management control while limiting workers’ authority. Large numbers of bureaucrats work to maintain the U.S. system. While in the United States about 13% of nonfarm employees are managers and administrators, that figure is about 4% in Japan and Germany. So U.S. companies rely on lots of well-paid managers to keep poorly paid workers in line, and the huge salaries of the top executives are simply the tip of an iceberg.

This highly unequal corporate system is buttressed by an unequal political and social structure. Without a powerful union movement, for example, there is little pressure on Washington to adopt a tax code that limits corporate-generated inequality. Several other high-income countries have a wealth tax, but not the United States. In addition, U.S. laws governing the operation of unions and their role in corporate decision making are relatively weak (and often poorly enforced). Without powerful workers’ organizations, direct challenges to high CEO pay levels are very limited (as is the power to raise workers’ wages). So income distribution in the United States is among the most unequal within the industrialized world, and high executive salaries and low wages can be seen as two sides of the same coin.

Arthur MacEwan teaches economics at UMass-Boston and is a D&S Associate.

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