U . S . CEOs Overpaid ? A Response to Bogle and Walsh

I am delighted to have the opportunity to respond to Jack Bogle’s and Jim Walsh’s comments on my article “Are U.S. CEOs Overpaid?” (AMP, May 2008), in which I concluded that the typical U.S. CEO is not overpaid. The main issue I addressed is whether the high pay of CEOs is largely a market phenomenon (and CEOs are paid appropriately), or, instead, is driven by the power of the CEOs and the weakness of their boards (leading CEOs to be overpaid). I concluded that high CEO pay is largely a market phenomenon, likely driven by technological change and the increased scale technological change allows. An important part of my argument was that many other groups—private equity and hedge fund investors, investment bankers, athletes, and lawyers—have seen their compensation increase substantially and by the same order of magnitude as CEOs, despite the arm’s-length nature of their compensation arrangements. In other words, market forces, not weak corporate governance, have bid up the pay of successful individuals in many sectors. For this reason, I argued that the proposed “Say on Pay” Act—requiring an advisory shareholder vote on CEO pay at every company every year—would not improve on or even affect the current market-based outcomes, but would impose additional costs on companies and shareholders. I approached my article and my testimony as a scholar. A scholar’s role is not to try to be popular or to present the public mood. Rather, a scholar has a responsibility to understand his or her area of expertise, to gather data carefully, to present accurate empirical results, and to present a logical, thoughtful analysis. Neither Professor Walsh nor Mr. Bogle addressed my key argument, refuted my empirical results, or disproved my basic conclusions. Professor Walsh never addressed the basic argument that the rise in CEO pay, like the pay of other groups, has been driven largely by market forces. Rather, much of his energy was focused on his view that it is unfair that CEOs and the other groups are paid so much. While the issue of fairness is a serious and complicated one, it is more relevant for taxation and education policy than for the issue of corporate governance regulation that I considered. Professor Walsh’s response had a number of other shortcomings. He began his response with a serious error, important to his argument, that he repeated several times. The error led him to overstate his measure of CEO pay by a factor of 70 times. He continued with an empirical analysis that was methodologically and logically flawed. Finally, Professor Walsh questioned my motives. One wishes that he had delved a little deeper. In doing so, he would have discovered that his suppositions were unfounded. In responding to my paper, Mr. Bogle largely acknowledged my empirical findings and agreed Editor’s Note: In the last issue of AMP (May 2008), Steven N. Kaplan wrote the lead article in the Exchange section. In that issue, John Bogle and James Walsh responded to Mr. Kaplan’s article. Here we give Mr. Kaplan an opportunity to rebut those responses.