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Monday, January 02, 2006

Pin the Party Tale on the CEO (and it Won't Help to Wear the Armor...)

The relative price of chief executive ability is 1 CEO to 431 workers. And that's just an average CEO, not one of those super duper ones some companies have:

Another Marie Antoinette Moment, Editorial, NY Times: There is no shortage of ... studies detailing the widening gap between what American companies pay workers and the millions of dollars those same companies pay top executives. But just in case anyone hasn't been paying attention, here enters David Brooks, chief executive of the bulletproof vest manufacturer DHB Industries Inc., to provide a fuller picture.

Mr. Brooks has made hundreds of millions of dollars ... from federal and municipal contracts for bulletproof vests. But while 18,000 of those vests were being recalled by the United States military, some from Iraq, Mr. Brooks was in the midst of throwing a private party for his daughter and her friends at the Rainbow Room at Rockefeller Center.

The bash was headlined by ... superstar rapper 50 Cent and the front men from the rock group Aerosmith were among the night's many performers. According to The Daily News in New York, the party's estimated $10 million price tag - a figure Mr. Brooks albeit called greatly exaggerated - culminated with guests reportedly walking out carrying gift bags valued at $1,000 each, stocked with digital cameras and video iPods.

Mr. Brooks is free to spend his money as he pleases, but he might have thought better than to draw added attention to his company right now. The November recall of the vests was the second by the military in 2005. The Securities and Exchange Commission is investigating the company and Mr. Brooks. And the company is also the target of several shareholder lawsuits after a material in some of its body armor failed a federal safety test.

Meanwhile, the party came less than three months after the release of a report on ballooning pay for chief executives that singled out Mr. Brooks for making $70 million in 2004 compared with $525,000 in pre-Iraq-war 2001. ... [plus] an additional $186 million in 2004 selling company stock. The same report, by the Institute for Policy Studies, a left-leaning research center, and United for a Fair Economy, a group seeking to narrow the gap between rich and poor, found that in 2004 the ratio of C.E.O. pay to worker pay at large companies had ballooned to 431 to 1. If the minimum wage had advanced at the same rate as chief executive compensation since 1990, America's ... working poor would be enjoying ... legal wages at $23.03 an hour instead of $5.15. ...

[C]orporate profits are being wrung in large part from cost cutting like reductions to worker health care and retirement, layoffs and plant closings. It would be nice to see corporate America put more effort - and money - into quality control and fair living wages for workers and less into exorbitant pay packages and bonuses for corporate chieftains. ...

I've heard the arguments justifying the ratio of CEO to worker pay, but I don't believe that CEO compensation approximates the outcome of a competitive market process. They're overpaid, and the usual market mechanisms fail to fix the problem.

    Posted by on Monday, January 2, 2006 at 12:11 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (11)

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