Question 1 Institutional investors are sometimes referred to as: Question 2 In response to concerns about the lack of transparency in financial accounting, Congress passed a new law called the: Question 3 In 2010, median compensation for directors at the largest U.S. corporations was (rounded to the nearest $10): Question 4 The main reason that American executives are paid so much is: Question 5 The mission of the Securities and Exchange Commission (SEC) is to: Question 6 Which if the following is not a legal right of stockholders? Question 7 Corporate governance involves the exercise of control over a company’s: Question 8 How are directors (members of corporate boards) selected? Question 9 The directors of a company are a central factor in corporate governance because they: Question 10 The Securities and Exchange Commission outlaws: Question 11 Which of the following is not a function of board committees? Question 12 The board committee that administers and approves salaries and benefits of high-level managers in a company is called the: Question 13 Which of the following arguments opposes the idea of high executive pay? Question 14 The activism of institutional investors in other countries has been spearheaded by: Question 15 Which of the following is not an argument for high executive compensation? Question 16 The law requiring that toys and infant products be tested before sale is called the: Question 17 An identifying marker placed on a user’s computer hard drive during visits in order to identify the user during each subsequent visit and to build profiles of their behavior over time is called a: Question 18 In some cases, businesses have banded together to agree on how they will treat their customers. This is called: Question 19 The act that requires lenders to inform borrowers of the annual rate of interest to be charged, plus related fees and services charges is called: Question 20 Which of the following limits the collection of information online from and about children under the age of 13? Question 21 In the United States, which of the following agencies enforces the laws prohibiting deceptive advertising? Question 22 Manufacturers making false or misleading claims about a competitor’s product is: Question 23 When businesses adopt voluntary policies for protecting the privacy of individuals’ information disclosed during electronic transactions, this is called: Question 24 A prime social responsibility of business is to safeguard consumers: Question 25 Online shoppers have always been concerned that: Question 26 Advertising that is targeted to particular customers, based on their observed online behavior, is called: Question 27 Consumers have become more dependent on businesses for product quality because: Question 28 Which organization brings together 300 nonprofit groups to espouse the consumer viewpoint? Question 29 Which of the following is not a goal of consumer protection laws? Question 30 One alternative to product liability lawsuits is called:
CEOs are easy targets. Everyone sees the headlines about another millionaire executive from Merrill Lynch or Countrywide Financial being hauled in on fraud charges and assumes that the fat cats are being overpaid. The New York Times reported that the average CEO is paid 200 times more than their employees and that many executives for the country’s largest corporations are being paid more than $15 million a year. Are they really worth that much more than other employees? But there’s a case to be made that well-performing CEOs generate tremendous value for their companies. The Case for CEO PayOne common misperception is that well-paid executives are “taking” money from employees. However, employees are paid according to the market and so are executives. A CEO’s pay is unrelated to employee pay. If the executive were to be paid less, those revenues would be redistributed among shareholders. But paying a CEO less simply because their pay appears too high won’t benefit shareholders. One study found that companies paying their executives more outperformed those that artificially restricted pay, according to USA Today. Critics of high executive pay may say that it’s not the amount so much as executives being paid no matter how well or how poorly the company does. But efforts to make pay based on performance are also often flawed. Take this example: An oil company paid its executives based on the success of the company. Of course, its success is highly dependent on the price of oil, a factor that the CEO has zero control over. In cases like these, the executive is paid more or less based on luck. The Case Against CEO PayNevertheless, few people argue that executive pay in the 1990s was reasonable, when CEOs made 300 times as much as the average employee. That’s when the market boomed with dot-com executives riding the wave. This led to a cultural shift that made executives (at least appear to be) more corrupt. “A good number of senior executives treated their companies like ATMs, awarding themselves millions of dollars in company loans and corporate perks,” Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, writes in Harvard Business Review. “It’s hard to dispute the idea that executives were somehow corrupted by the dazzling sums of money dangled in front of them.” All of this created what appeared to be another Gilded Age — robber baron business leaders who bankrupted their companies. Critics say that it’s not good CEOs leading successful companies that are necessarily the problem. Instead, it’s criminals who escape from their failing businesses with the proverbial “golden parachute.” In this case, legislation and enforcement may be better tools for addressing the problem. For business leaders, remaining humble about success and taking responsibility for failure are keys to maintaining a strong rapport with employees. When workers see a leader who is invested in the business’s success, they’re less likely to be concerned with how much that executive is getting paid. RELATED POSTS: Quiz 8 first attemptThe directors of a company are a central factor in corporate governance because they: Question 53 out of 3 pointsWhich of the following arguments opposes the idea of high executive pay?
Steve Kaplan misses an important point when he posits that only the “external equity” or the market should determine how much a CEO is paid. If companies don’t also focus on “internal equity”–how the highest paid executive’s pay compares with that of everyone else in the organization–they risk losing their own staff’s dedication and focus. Indeed, a bias to focus only on the external market in recent years has helped push executive compensation way out of whack. Because of the yawning gap between the leaders and the led, employee morale is suffering, talented performers’ loyalty is evaporating, and strategy and execution is suffering at American companies. Employees really do care about this issue, and a smaller gap makes for greater solidarity, and as a result better performance, throughout the workplace. At Whole Foods, we’ve made adjustments to keep the external and internal equity perspectives in balance. We have a salary cap–the maximum allowable ratio of the highest cash compensation to average employee cash compensation–to address internal equity. But that cap has increased over the years so that we can help avoid the loss of valuable executives. Twenty years ago, when we were only a fraction as large as we are today ($40 million in sales then compared to $8 billion now), the salary cap ratio was 8 to 1. Today it’s 19 to 1. That puts the maximum cash compensation anyone can make at Whole Foods at about $650,000. Is this cash compensation too low to retain top executives? Apparently not, because Whole Foods has never lost to a competitor a top executive that we wanted to keep since the company began more than 30 years ago. The truth is that maximizing personal compensation is not the only motivation that people have in their work. As we move up Maslow’s Hierarchy of Needs, we discover that once our basic material needs are satisfied, money becomes less important to us. In my experience, deeper purpose, personal growth, self-actualization, and caring relationships provide very powerful motivations and are more important than financial compensation for creating both loyalty and a high performing organization. It’s also a great exaggeration to argue, as Steve does, that “market forces” are the primary reason CEO pay has increased so much. Many studies (for example, Lawrence Mishel’s study “The State of Working America 2005, 2006”) show that back in 1965 the ratio between CEO pay and average company pay was 24 to 1. By 1980 the ratio had increased to 40 to 1. The ratio tended to increase every year, and in 2000 it had increased to 300 to 1. Over the past 10 years the ratio has bounced around considerably but is currently close to that peak of 300 to 1.
If CEO compensation is primarily driven by competitive markets, then how come the ratio was only 24 to 1 back in 1965 and is about 300 to 1 today? Surely the market demand for good CEOs is no greater today than it was 45 years ago or 25 years ago. Are CEOs today really worth that much more than their comparable peers were worth just a few decades ago? It’s also illuminating to consider how much American CEOs get paid relative to CEOs in other countries. Mishel’s study shows that the average American large-company CEO makes on average 225% more than the average large-company CEO in the other 13 largest industrial countries. Are American CEOs really that much more valuable than CEOs in other industrial countries? Are these differences in CEO pay really being determined by competitive markets, or are other factors distorting markets? The essence of the problem with CEO compensation is that the owners of our public corporations, primarily institutional investors, who own more than 70% of the stock, have very little incentive either to make long-term investments in companies or actively serve on their boards of directors. This means that the owners of our public corporations are seldom actively involved in corporate governance or in closely monitoring executive compensation. If they are unhappy with a company they usually just sell their stock. Instead the burden falls almost entirely on the directors, who are effectively self-elected, since institutional investors seldom oppose the board’s slate of directors. The outside directors of most of our corporations also seldom have large ownership stakes in the companies they serve. While most outside directors are well intentioned and are usually highly capable, their own interests can sometimes diverge from the interests of the owners. I’ll put up another post later in the debate to detail my other suggestions for fixing CEO compensation. John Mackey is the chairman and CEO of Whole Foods Market. |