Facebook is the quintessential
small company with high value that are becoming more common in the modern
economy. How small is small? As of December 2015, it employs 12,000. What
about Google? 57,000 employees. And if we turn to the other side of the modern
economy, services, we find that Walgreens has 240,000 employees – I am
deliberately not showing Walgreens instead of Walmart because we all know that Walmart
is a giant firm. Taking the step back into industry, the formerly dominant part of the economy, Ford Motors has 199,000
employees (again I am not picking the largest, which would be GM).
When these firms do well – or poorly
– who do we credit or blame? The answer is surprisingly political. In a recent study of executive compensation published in Administrative Science Quarterly, Abhinav Gupta and Adam Wowak
examine whether the different views of leadership held by Republicans and Democrats
affect how Chief Executive Officers get paid. The idea is simple – members of the board of
directors determine how much the CEO gets paid, and they reveal their political
views through donations to the parties (naturally they can donate to none, one,
or both). If the board members believe that CEOs are largely responsible for
what ten to hundred thousand people do, they will pay the CEOs more on average,
and they will also make the pay more sharply dependent on the company's recent
performance.
It is not a secret that Democrats attribute
a lot of credit to the collective effort of workers and managers, and less to
the CEO. What has become clear recently is that there is a clear authoritative
streak in the Republican Party, and accordingly a tendency to credit the
results to the CEO. Do the results of the study bear this out? Abundantly. A Republican
dominance of a board leads to higher CEO pay. It also leads to more dependence of
the CEO compensation on accounting profit and stock market value increase. Even
more revealing: these relations are stronger when the analysis is limited to
the compensation committee, which is the subgroup of the board that determines
CEO pay (usually with the help of consultants).
So now we know that CEO pay is
political, in additional to the earlier findings showing that it is customary
and performance dependent. Does that make CEO pay unfair? Well, actually the
answer to that is political too. Consider how you feel about this issue; it
probably fits your political views in general.
