(CNSNews.com) - Do corporate executives deserve their big pay packages? Is the CEO of your company "raking in the big bucks while running the company into the ground?" And how does your salary compare with that earned by the head of your company?
Those are a few of the questions the AFL-CIO is addressing in its 2008 Executive PayWatch campaign.
Union officials are calling for "reform." They want Congress to pass a "say on pay" law requiring publicly traded companies to submit executive pay plans to a nonbinding shareholder vote each year. "Such an advisory vote would prompt corporate boards to engage shareholders in meaningful conversations about appropriate levels of executive pay before approving executive pay," the AFL-CIO says.
But a Senior Fellow at the Cato Institute, Alan Reynolds, told Cybercast News Service that consumers should understand that the incentive-based pay system is what actually drives companies to success.
In 2007, the CEO of a Standard & Poor's 500 company received, on average, $14.2 million in total compensation, the AFL-CIO said, citing preliminary research numbers from The Corporate Library research firm.
"Excessive CEO pay takes dollars out of the pockets of shareholders -- including the retirement savings of America's working families," the AFL-CIO claims on its Web site. "Moreover, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company, its shareholders and employees." (The AFL-CIO specifically points to the mortgage foreclosure crisis.)
The AFL-CIO complains that compensation for top executives has grown at an unprecedented rate in the past two decades, resulting in a dramatic increase in the pay ratio between executives and rank-and-file employees.
At a press conference Monday afternoon, Richard Trumka, the secretary-treasurer of AFL-CIO, put numbers to what he sees as a problem: "In a span of about 25 years, we have seen the CEO's pay ratio explode from just 42 to 1 to 364 to 1," he said.
The Cato Institute's Reynolds told Cybercast News Service that executive salaries have definitely risen. But, he added, "You should never believe a number like that before you find out just how it is constructed."
For example, what is an "average CEO," Reynolds asked. "Oftentimes groups like AFL-CIO choose the highest possible paid group and compare it to the lowest paid (workers). They both understate and overstate." Reynolds said the AFL-CIO's numbers are "probably bogus and dishonest. It would be interesting to see the numbers measured fairly and consistently."
The AFL-CIO notes that boards of directors set CEO pay. "Frequently, however, directors award compensation packages that go well beyond what is required to attract and retain executives and reward even poorly performing CEOs. These executive pay excesses come at the expense of shareholders, as well as the company and its employees," the AFL-CIO said.
Daniel Pedrotty, the director of the AFL-CIO's Office of Investment, said boards of directors are failing to police corporate CEOs and serve as employees' representatives in the boardroom. "They are failing to do their duty and play the key role and creating the sub-prime mortgage mess that is turning the American dream into a nightmare," Pedrotty said on Monday.
The AFL-CIO says at most U.S. companies, the CEO serves as chairman of the board -- and may also dominate the election of directors. "When the same person serves as both chairman and CEO, it is impossible to objectively monitor and evaluate his or her own performance," the union complained.
The AFL-CIO argues that CEO pay will be reformed only when corporate boards become more "accountable."
Pedrotty said not only are U.S. corporate executives paid too much, but they are paid disproportionately more than executives anywhere else in the world. "The notion that somehow we are paying for performance, and that this is related to long-term value creation, is absurd," he said. The argument that high compensation is needed to retain and recruit top executives doesn't hold up when compared to executive compensation in other countries, he added.
But Reynolds' called that an "apples and oranges" comparison: In France, where taxes are higher, executives don't want to be paid in cash -- they want to be paid in non-taxable benefits," Reynolds said. "There are also very few companies abroad that are the size of our big companies. If you see a CEO that works at a company that is one tenth the size of Microsoft and it makes one tenth the salary, so what?"
Reynolds said boards of directors want to reward their CEOs for good work and entice them to get their companies to perform at a higher level. "They don't have an incentive to do anything but honor the deals they already made when hiring the executive," he said. "I can only think of one company I don't invest in because I think the CEO is paid too much."
Reynolds said that as an investor, he likes the CEOs of the companies in which he invests to have "strong incentive to perform."
"What isn't noted in many of these studies is that the majority of the payment packages are in stocks. If the company doesn't do well, neither does the executive. You can't count that kind of payment in the same way you would salary," Reynolds said. "If he does a bad job he doesn't get paid. It is simply wrong to say that's at the expense of workers."
The AFL-CIO is urging union members to press for passage of the Shareholder Vote on Executive Compensation Act (S. 1181), which Sen. Barack Obama -- the Democratic presidential contender -- introduced in May 2007. The House already has passed a similar "say on pay" bill, H.R. 1257.
The AFL-CIO is the largest federation of unions in the United States. It launched its Executive PayWatch campaign in 2007.
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