CEO compensation

NYU Finance Professor Roy C. Smith writes in support of high CEO compensation in today's Washington Post:

Tell me if I'm wrong: You think America's top corporate executives are obscenely overpaid. You think recently ousted Home Depot chairman Robert Nardelli was just the latest in a long line of high-flying CEOs to negotiate himself an overinflated severance package and to waft out the door thumbing his nose at us all. You think it's about time that the Senate started considering, as it did last week, closing some of the tax loopholes that have made it possible for these corporate scalpers to get away with highway robbery for so long.

I say, think again.

Executive compensation today isn't the sinful overindulgence of greedy executives that it's made out to be. There may be some abuse among the 7,500 publicly traded corporations in the country, but most of the CEOs who receive those huge pay packages not only earn them but also, yes, deserve them.

Most have increased their companies' value and improved their performance far more quickly than was common in the 1970s and '80s. Yes, corporate compensation has gone sky high, but the result is better-run, better-performing companies than the United States has ever had. And most of us -- from shareholders and investors to average consumers -- are reaping the benefits.

Frankly, this makes very little sense to me, particularly when he says, "Most have increased their companies' value and improved their performance far more quickly than was common in the 1970s and '80s." I just took a quick look at the avarage annual rates of return over the period since the beginning of 1950 (S&P 500 stocks). Here's what they look like:

1950-59 = 16.1%
1960-69 = 12.4%
1970-79 = 5.4%
1980-89 = 14.3%
1990-99 = 18.6%
2000-06 = 5.3%

Now, apart from the 1970s, when inflation ran rampant, I don't see any significant pattern here that would suggest high executive pay in recent years led to high performance. Indeed, if anything, the performance in the past six years looks pretty dismal. But, even if you include the roaring 90s, the average annual return over the years since 1989 has been only 10.85%, while the average annual return over the years 1949 through 1966, when executive pay was far lower, even in real terms, and in relation to average wages, the average return was 14.4%.

Perhaps Dr. Smith believes executives deserve their pay, but these figures sure don't prove it by me. And, of course, there are always the Lucents, the Enrons, the AT&Ts, the Worldcoms, the Xeroxs, etc. (I could go on) to point to. By just what measure does Dr. Smith think today's companies are so much better managed than those in the past?

Frankly, I see no way that most of these guys are worth the difference between their exalted compensation packages and those of any of a large number of perfectly competent middle managers who could take over their positions without batting an eyelash -- or having anyone else bat an eyelash either except for the shock wave it would create among the elite. In fact, I am of the belief that a good many major corporations would run better if their CEOs just went on an extended vacation.

A controlled experiment would be intesting, wouldn't it?