CalCon,
We can certainly agree that those CEOs who have reached their positions “honestly” deserve our respect. I have no idea what percentage of CEOs falls into that category. For brevity, can’t we just assume that the discussion here concerns only those who fall under the other category?

HP,
Laws are in effect today that prohibit such things as discriminatory hiring practices and some closed union shops. These laws regulate wages indirectly. I would certainly hope that the government could pass similar rules against collusion without needing to directly regulate CEO salaries. As you say, if the government were to become involved in directly setting CEO salaries then bad things would happen. No doubt.

The problem is the collusion, not the salaries.

1. The government is not likely to do it correctly. Price controls historically have caused ‘pay’ in other areas, thereby muting the supposed price control and reducing economic efficiency (thereby making the problem worse). For example, during WWII companies were prohibited from competing with each other over employees so the government set in price controls - prohibiting one company from offering a higher salary to an employee over another…so what did the companies do? They started offering ‘perks’, things like health insurance and so forth (this is what started our modern employee health insurance system). In the end the employees still got higher ‘pay’, they just got it in a different form. However, this distored the free market and made it less efficient, the effects of which we are still feeling today (with higher medical costs).

As long as the incentive is still there to attract better CEO’s, an incentive that will not go away, intelligent and creative people will always find a way to get around the laws…but in doing so the economy is less efficient - something that harms us all.

2. However, suppose for the sake of argument that the government does create an efficient price control on CEO pay…what is likely to be the scenario? The likely scenario is that potential CEO’s will flee to other more lucrative areas - like hedge fund managers. Do you think our best and brightest going to hedge funds instead of CEO positions is better for our economy? I certainly don’t.

A recent article titled, Why Do We Underpay Our Best CEO’s?, in the first issue of The American (yes, I subscribe) explained this point:

Sure, some CEOs aren’t worth their outrageous compensation, but a bigger problem is that large public companies, in many cases, don’t pay enough. The best and brightest minds are increasingly drawn from running key businesses to other pursuits that may not be as socially useful—but pay much more.

…

But are they really? In fact, there’s strong evidence that, far from being paid too much, many CEOs are paid too little. Not only do the top managers of multibillion-dollar corporations earn less than basketball players (LeBron James of the Cleveland Cavaliers makes $26 million), they are also outpaced in compensation by financial impresarios at hedge funds, private equity firms, and investment banks. Should we care? Yes. If other positions pay far more, then the best and the brightest minds will be drawn away from running major businesses to pursuits that may not be as socially useful—if not to the basketball court, then to money management.

….

One reason for this is that the smartest potential CEOs are being siphoned off by higher-paid professions where public scrutiny and board control are less pronounced. After all, the same talent pool that produces doctors, lawyers, portfolio managers, and investment bankers also produces a fair share of CEOs. When it comes to compensation, the peer group for a CEO is not just the CEO next door, but also the venture capitalist on the other side of the country, or the investment banker on the other side of the world.

The latest statistics from Holt Private Equity Consultants and Dow Jones Private Equity Analyst show that the average employee at a venture capital firm will receive $770,000 in total compensation this year while the average employee of a private-equity firm earns $1.2 million. That’s the average employee, not the boss. Senior partners at venture firms earn about $1.5 million, general partners $2 million. Even those figures pale in comparison to hedge funds. According to Institutional Investor magazine, average compensation for the top 25 hedge fund managers was $251 million in 2004—that’s more than 20 times as much as the average CEO. Leading the pack was Edward Lampert, who earned just over $1 billion.

Charles Munger, who is Warren Buffett’s close associate at Berkshire Hathaway, Inc., and heads Wesco Financial himself, has eloquently lamented these developments. “I regard the amount of brainpower going into money management as a national scandal,” he said at Wesco’s annual meeting. “I think it’s crazy to have incentives that drive your most intelligent people into a very sophisticated gaming system.” The incentive, of course, is money. There may be not enough of it in running public companies, and too much of it elsewhere.

The full article goes into much more detail on this topic and directly addresses the collusion charge LaurenceB brings up above. I stronly recommend everybody interested in this topic read it in full. Click here to read it all.

3. CEO pay is not zero sum, by that I mean that the social costs of a company overpaying its CEO is near zero. Overpaying CEO’s may affect the companies competitive edge, it will affect the return shareholders receive, and it may affect the companies long term standing, but all of this has little to no affect on the general economy. So unless you have a deep psychological hatred of the rich, I see no pressing need for the government to regulate CEO pay.

In conclusion, as weak as the check the stock market and shareholders have on excessive CEO pay, it is enough in itself for they are the ones that primarily bear the costs - so the government, like in many other circumstances, is likely to make matters worse if it interferes.

The fact is that it has always been the case that the fringe excesses of the free market (monopolies, insider trading, excessive union practices, etc.) have needed to be reigned in. To me, the issue of CEO pay acquired under bad faith bargaining falls into that category.

While HD’s revenue and profits have doubled (approx). Lowe’s revenue in that same period have gone up 150% and its profits have gone up nearly 300%. Lowe’s has clearly had greater suceess than HD in Nardulli’s term.

What kind of research have you done on Home Depot?? Stock prices alone are not an indication of how well a company is doing, particularly over a short period of time. Whether Mr. Nardelli was worth what he was paid is certainly debatable, but one ought to look at several factors besides stock performance. One baromoter to consider is revenue growth. Under Nardelli, Home Depots revenues grew by several BILLION!!! Earnings also grew substantially. Unfortunately for him, he came in during a difficult period for the stock market in general. He started in December of 2000, about 9 months after a historic market peak, and 9 months before 9/11. The stock market sucked pretty bad during that period nit to mention several years after that. Under his leadership, revenue more than doubled as well as profits.