A Modest Proposal to Reduce CEO Pay

Earlier this year, I read an interesting report from our friends at the Corporate Library. It seems that in 2007, CEO compensation rose by a median rate of nearly 16% among S&P 500 companies, compared with just 2% at smaller firms. That seems fair, right? After all, the leaders at big companies typically aren't paid too highly.

OK, you can stop laughing now. It was a joke. Just check out these recent total compensation amounts:

Source: Forbes. Annual compensation is for most recent available fiscal year, and the total compensation includes stock gains.

As I'm sure you suspect, these are just a handful of the multi-multi-million-dollar payouts that CEOs collect at scores of companies, many of which aren't even performing all that well. Consider Limited Brands, for example -- its stock sports a five-year average annual loss of more than 11%. Starbucks's loss is even sharper than that.

I'll concede that some CEOs sure seem to be bringing in much more than they're paid, even when their pay seems ridiculously steep. Yum! Brands, for example, has averaged an annual gain of nearly 9% over the past five years, walloping the market. Even Oracle's 4% gain managed to beat the S&P 500.

It's outlandish, but why not?
Here's a modest suggestion: A Dutch-auction-style competition for the job. That's right -- instead of CEOs merely asking boards of directors for raises because their peers are getting tens of millions, and boards of directors simply rolling over -- because many of them are CEOs, too, and who really wants to argue with the CEO or his compensation consultant? -- have a contest to see how little a CEO can be paid.

Imagine Goldman Sachs, for example. Who wouldn't want to be its CEO? Surely there are at least several dozen executives in its hallowed halls (or elsewhere) who would love to be CEO -- and who would do well at it.

The board of directors simply needs to identify these folks (or have them identify themselves) and ask them to bid on the job, stating the least amount of money they'd take for it. Each candidate's talents and recommendations and other attributes can be checked out at any point in the process, before he or she ends up offered the job. It can thus be limited to truly qualified folks -- both insiders and outsiders.

Lloyd Blankfein recently collected more than $70 million for the top Goldman post. Perhaps Bernie Wigglesworth would do the job for a mere $30 million. Perhaps Mavis Snaptree is eager to take the helm and would only require $2 million! Maybe Gus Trueblood has something to prove, and will take just $800,000. Ding, ding, ding! We have a winner!

Depressing context
Who says that CEOs need to be paid so much? Why are so many taking home millions, when lots of other skilled folks would do the jobs for hundreds of thousands? According to the Economic Policy Institute, CEOs have earned about 20 times the pay of their average employee for most of the past 100 years. That may strike you as too much, but get this: These days, that multiple has soared to about 400 times the average worker's pay. If the average is $40,000, the CEO is getting $16 million.

By contract, a recent BusinessWeek article noted that the ratios of CEO pay to average employee wages in Britain, Canada, and Japan remain much lower -- between 11 and 22.

Given this situation in America, I don't see why companies don't try the Dutch auction route. It can save millions, if not billions, over the long haul, and it will attract people who are perhaps more interested in the job than the pay.