Pay Is Company’s Prerogative
Critics of CEO pay are lampooning the $210 million Robert Nardelli received after a disappointing six-year tenure at Home Depot. Rep. Barney Frank, the new chairman of the House Financial Services Committee, calls Nardelli’s pay package “confirmation of the need to deal with a pattern of CEO pay that appears to be out of control.”
By what right does the government, or anyone else, claim the power to dictate what owners of Home Depot or any other private company can pay someone to run their company? It’s their company. If through error or irrationality they overpay (or underpay, and so fail to attract good managers), as Home Depot may have done, the loss is theirs.
The only valid reason to be concerned about CEO pay is that our government actively prevents market forces from operating. For instance, restrictions on board membership and hostile takeovers today stop large shareholders with extensive business knowledge, especially financial institutions, from influencing CEO pay. Anyone concerned about the health of corporate America would demand repeal of all such regulations.
But far from demanding repeal of the regulations, critics of CEO pay agitate for ever more control over corporate governance. They are not concerned with corporate wealth creation, but with “corporate social responsibility” — the idea that executives and shareholders should be forced to sacrifice moneymaking for the sake of sundry “stakeholders.” These critics demand that companies staff boards with labor activists, invest in irrational environmental schemes and provide above-market health benefits with no regard for the cost to shareholders.
This vision of corporate altruism is not only destructive, it is immoral. America is the land in which every individual, including a CEO, can pursue happiness through productive work. Morally, CEOs should focus on creating wealth and making profits for their shareholders, and they should be regarded as heroes, not villains, for doing so. Theirs is an enormously demanding job, with billions of dollars riding on their judgment. They should be paid handsomely for their services.
How much? That is for the owners of each company — and more widely, the participants in a truly free market — to establish.
