Healthy democracies and dynamic economies require strong leadership in every sector of society. But current pay practices send quite a different message: Only corporate leadership really matters.
The enormous size of today’s CEO paychecks only makes sense if we assume that these individuals add tens, hundreds, even thousands of times more value to our society than the leaders we hold responsible for educating our youth, protecting our national security, providing essential public services, or crafting the laws that govern us.
Here’s one example: University of Pennsylvania President Amy Gutmann was one of the highest-paid nonprofit leaders in 2005, with $675,000 in earnings, according to the Chronicle of Philanthropy’s most recent survey.
That’s hardly a paltry sum. But compare her pay with the $60 million pocketed last year by Bob Simpson, the chief executive of XTO Energy. This company had lower revenues last year than UPenn and employs less than 2,000 workers. Ms. Gutmann, for her part, oversees an enterprise with nearly 5,000 faculty and 24,000 students.
Is running an oil company really 90 times more valuable than leading one of the top-ranked institutions of higher learning?
Overall, the 20 highest-paid executives of publicly traded corporations make, on average, 38 times more than the country’s 20 highest-paid nonprofit leaders.
The pay gap stretches even wider between the corporate and public sector. Last year, the top 20 highest-earning CEOs made 183 times more than the top 20 federal executive branch employees (a group that includes our president), 204 times more than our 20 highest-paid military generals, and 212 times as much as the top 20 ranking members of Congress.
The private equity boom has pushed the pay ceiling for business leaders even further into the stratosphere. The highest-paid hedge fund manager last year was James Simons of Renaissance Technologies, while the top-earning nonprofit leader was Harold Varmus, the Nobel Prize-winning chief executive of Memorial Sloan-Kettering Cancer Center. Mr. Varmus made a more than generous $2.5 million. Mr. Simons’s take: $1.5 billion.
The not-for-profit world, of course, still attracts high-quality, committed personnel. But there’s no denying that these extreme leadership pay gaps discourage many individuals with leadership talent from entering less lucrative nonprofit fields where their skills could make an important social contribution.
These vast disparities also keep a revolving door spinning between government and the business world that breeds conflict of interest and corruption. Political leaders hoping to land lucrative corporate jobs have an incentive to shape public policy to serve the narrow interests of potential future employers and clients rather than their own constituents.
The solution to the leadership pay gap problem? We certainly don’t need to raise the pay of nonprofit executives like UPenn president Amy Gutmann. She already makes more than enough. We need, instead, to address the problem of excessive pay in the for-profit sector. And there is a growing debate in Congress – and on the presidential campaign trail – on just how to do that.
The legislation that appears to have the most momentum goes by the label of “say on pay.” This bill would give shareholders the right to take an annual advisory vote on executive pay packages. The US House of Representatives approved the measure in April, and Sen. Barack Obama has introduced a companion bill in the Senate.
Rep. Barbara Lee (D) of California is promoting another reform that would cap the amount of executive compensation corporations are permitted to deduct off their taxes to 25 times the pay of a company’s lowest-paid worker.
Other reformers are talking about taking a similar approach to government procurement, by denying contracts to corporations that pay their top executives more than 25 or 50 or even 100 times what their workers earn. We already deny contracts to companies whose discriminatory employment practices increase racial or gender inequality. Why should we let our tax dollars go to companies that contribute to extreme economic inequality?
Most Americans are well aware that business leaders make enormously more than the workers they employ. The gap between business leaders and other leaders in our society has received considerably less attention. And yet we ignore this leadership pay gap at our peril.