Too Much? CEO Compensation and Catholic Social Teaching

Addressing the Catholic Finance Association in New York City: October 7, 2014.  

I am happy to come to this conversation not only as a Jesuit priest, but also as a proud graduate of the Wharton School of Business. To establish some bona fides, I was a finance major at Wharton, took a job in the Financial Management Program at General Electric in New York City, which was then the International Finance and Accounting headquarters of GE, worked after my training program for a year in international accounting, and then took a job running the FMP program at GE Capital in Stamford, Connecticut, and finally moved into human resources.  So I come before you as someone who knows that business is a real vocation, who still has many friends in business (and specifically in finance) and who also knows that business is a real way to contribute to the common good. 

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So I approach our discussion of executive compensation from a financial point of view and a human resource point of view, but also, of course, from a Catholic point of view. You will hear a lot about the financial perspective and the human resource perspective tonight from our other distinguished participants, but I think what I might be able to contribute is the Catholic perspective.

The Catholic perspective on salaries, compensation and labor is the Christian perspective in general, and the basis of that is always the Gospels. You all know what Jesus commands us in the Gospels, and, we might say even more accurately, invites us to: Love our neighbor. Pray for those who persecute you. Forgive someone seventy times seven times. And of course care for the poor. Jesus is born into a poor family in a poor town, he works as a carpenter, which at the time would've been seen as a very low-class occupation (below the peasantry, since the carpenter did not have the benefit of a stable plot of land), he sees the disparities between the rich and poor in his own lifetime, and he constantly pointed us to the poor and the marginalized in his public ministry.  So this is the Christian perspective.

But Catholic teaching, and specifically Catholic Social Teaching, has a great deal to say about economic conditions in general, and this teaching builds on the Gospels and, as embodied in the great papal encyclicals, enjoys the highest teaching authority in the church.

Now, just to tip my hand, I believe that capitalism is the most efficient economic system in distributing goods and services to people. But it's also not perfect. How do we know that it's not perfect? Because we can step outside today and probably after just walking a few feet, meet a homeless person begging for food. We can also see gross disparities in living conditions around the world and in this country, and even, given what we are talking about here, gross disparities in executive compensation compared to what the average worker makes. As you may know, CEOs in the United States make something like 300 times as much as the average worker, and 700 times that of the minimum-wage earner.  That statistic comes from Forbes magazine, by the way.

Catholic Social Teaching has focused more on the issue of minimum wages than anything about the upper end of the pay scale. There is, as far as I know, nothing explicit about CEO pay in the major Catholic social teaching documents, that is, about maximum wages.  Nonetheless, one can easily extend the logic of Catholic Social Teaching to address of the thinking of our church’s social teaching to what I would call excessive maximum wages, which effectively crowd out the ability to provide a decent minimum wage for the lower wage workers.

In other words, we need to remind ourselves that the dollar slipped into the pocket of the CEO come out of the pockets of the person in the factory. Money in the corporation is finite. A corporation makes a certain amount of profits per year.  CEOs and boards, when they are deciding on CEO pay are, in essence, then, allocating dollars.  

Fairness, equity, and solidarity are constant themes in Pope Paul VI's great encyclical Populorum Progressio.  Pope Paul, who was hardly a liberal nutcase, decried the situation where "misery and luxury rub shoulders" which suggests a great level of discomfort with the extremes of the rich and poor. Other encyclicals have repeated the church's opposition to such great levels of disparity in income.  After all, the low-wage worker often works much harder than the high-wage earner, and often in far worse working conditions. Jesus, the humble carpenter from Nazareth, would have known that.

In fact some Catholic theologians today are positing not just a "minimum wage," but even "maximum wages."

So the question I would ask Catholics and Catholic CEOs is quite blunt: What do you want to say to Jesus when you reach the gates of heaven? Do you want to say that you took as much as you can, even as much as the market would bear, because your board okayed it?  Or do you want to say you accepted what you thought was just, and understood the needs of your fellow men and women, who may have worked even harder than you? 

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Iam Acommentor
3 years ago
I would ask a different question: What did you do with the money you accepted? The essay suggests that there is something wrong about accepting the compensation that is commonly offered. But I think the injustice is in the system that has established this norm. Is declining the excessive compensation the best way to counteract that unjust norm? Or is it better to accept the compensation and do something good with it? If the excessive compensation is declined, there is no guarantee that the unjust system will distribute it to lower paid workers. More likely, the system would distribute to shareholders or use for some other purpose.
Patrick Walsh
3 years ago
Catholic economics professor here, teaching at a Catholic college. Thanks to Fr. Martin for bringing up this important question. As economists, we define a "fair" wage as reflecting the worker's productive contribution to the success of the organization. So from janitor to CEO and between, we have to ask "Is this income proportional to the revenue brought in by this employee?" For many corporate CEOs, the answer is "probably not". There are many distortions - CEOs sit on each others' boards, and return each others' favors, etc. - that push a CEO's pay above their "marginal product". I have no problem with a CEO reaping some benefit when their company thrives, but all to often we see CEOs with huge earnings while their company fails. That's not just unfair, it's inefficient! (which tells you all you need to know about economists :). I would caution, however, that mega-huge, publicly-traded corporations only make up ~4% of all firms in the US (something like 200K out of 5.7 million firms). They may be egregious, but they are not representative. The modal "CEO" in the US is the proprieter of a dentist's office, restaurant, or car dealership. When thinking about policies to address CEO pay, we should not lump these (many) firms in with the (few) huge corporations.
JIm MacNee
3 years ago
Patrick, While the author mentions Pope Paul VI's writings on fairness, the end question he poses is what is just - an entirely different spin on things and well worth thinking about.
Chicago Dave
3 years ago
Patrick brings up a ton of context when evaluating such a topic. I would also advise others to take the time to actually sift through the report from the EPI chart posted in this article, which provides even more context on this subject. After reading that report, and as Patrick indicates, the chart highlights a small segment of such "overpaid" CEOs. Another item indicated in the EPI report is the question on whether this spike in CEO wages is due to "fair" competitive wages or simply the case of the financially advantage oligarchy colluding and taking more of the pie. The 3rd point not mentioned in this article was the shifting of the economy from manufacturing and into financial services, which has grown larger and dependent on participation that leaves a segment of the population behind. I would would challenged any future opinion piece, policy report, or blog to begin by giving more context on WHY CEO wages have drastically increased relative to us common folk, rather than immediately taking the stand that anyone with high income does it at the expense of the little guy.
Gene Van Son
3 years ago
Fr. Martin's point is valid, and so is Iam Acommenter's. If some board offered me a few million dollars plus stock options, bonuses, and other perks to run a company they would probably rescind the offer if I told them 'oh no, that's far too much.' Better to take the money and donate the excess to charity. But too few do that. The secular society we live in today is driving morality, and idiot protestant televangelists (not to single them because there are many others) are only adding to the confusion. Even worse, too many Catholic voices are offering confusing and even in some cases contradictory messages. And some argue that the Church has lost its moral authority due to the inept handling of the pedophilia scandal. What interesting times we live in.
Michael Pettinger
3 years ago
The question of what a CEO does with his/her salary is worth asking, but I'm not convinced that it really solves the problem of unjust disparity in compensation, since it still leaves the power to decide where those funds go and what sort of work they do in the hands of a relatively small number of people. I'm going to assume, maybe incorrectly, that tying executive compensation to the earnings of an average worker in a corporation leads to raises worker compensation. If that assumption is correct, then I would argue that it is far more effective in empowering people and far more respectful of the dignity of the worker than trusting the wealthy to take care of the poor.
Susan Wilcox
3 years ago
I posted this on your facebook and a friend suggested that I post it here as well. Fr. Martin, you wrote "Now, just to tip my hand, I believe that capitalism is the most efficient economic system in distributing goods and services to people." Then you go on to cite some of the many wrongs of capitalism. It raises questions in my mind about your thoughts. One is-- why then do you admire capitalism? And in this process of delivery of goods and services, what is the interior quality? Doesn't capitalism require the commodification of life whether it's what's extracted from nature or extracted labor from people always looking to get the most for the least investment?
Joseph J Dunn
3 years ago
It is popular today to compare, and find linkages between, the high pay of CEOs and either the pay of the average worker or of the minimum-wage worker. I think that doing so confuses some issues that are each important in their own way. That confusion can leave us unsuccessful on all fronts. The CEO’s pay in a large, publicly-traded corporation is a matter for the board of directors, who represent the shareholders—the owners of the corporation. Much of this work is delegated to a Compensation Committee of a few independent board members and, yes, they often employ consultants. Out of the cauldron arises the CEO’s compensation package. Fortunately, more corporations are starting to get a shareholder vote on CEO compensation, and in a few well-publicized cases the package has been revised downward in response to the shareholder vote. I know of no case where the reduction in CEO pay was distributed to workers. The savings became profit for the corporation, at some point to be distributed to shareholders. All compensation policy is rightly the purview of the board of directors. Some boards have established a policy of paying above-market wages even for low-skilled and/or part-time workers. These boards pay their CEOs based on what they consider his or her leadership role to be worth to shareholders, in a competitive marketplace for CEOs. Separately, these boards have determined that, for lower-level workers, pay will be set at a level higher than the minimum wage, and higher than might be required based purely on competition in the local marketplace for competent workers. Most likely, the board has considered principles such as “living wage”, etc. Workers’ pay that is based on principle becomes a claim equal in weight to the CEO’s claim for compensation, and the shareholders’ claim to profits, which are the remainder after the workers and CEO have been paid. Consideration of CEO pay and worker pay as somehow having a proper ratio, or a dollar gap not to be exceeded, confuses two issues, each of which merit principled consideration.
Carl Schlachte
3 years ago
Much as I like and admire James Martin, I think he hit this one with too broad a brush. One commenter has already noted that the very term "CEO" can be applied to firms that have $0 in revenues up to hundreds of billions. There's not any data I'm aware of that shows that ALL CEOs are making 300x the average worker. It's a sensational number and certainly compelling but if he tried that analysis on any execs at GE, I'm sure he'd get skewered for letting the ends of the bell curve drive the statistic. That is to say: Larry Ellison's (and his ilk) pay package swings the entire data set up. The messy truth is in the middle. Not that I'm trying to defend even Mr. Ellison's $60M+ pay package. I say this as a CEO of both public and private companies, as well as a board member of several public ones too. I sit on those compensation committees that hand out those pay packages. The question James doesn't ask is: who do we (the Board) feel responsible to? The answer is as uncomfortable as it is true: it is you and also probably him (although I'm not sure if he has a pension or a retirement savings plan). You see it's easy to pick on the CEOs but in public companies we are all incentivized and watched (and sometimes sued) by a loosely understood thing called "shareholder value"--it's your shares held in person or through some public trust that we look at when we hand out pay. It's hedge funds and banks it's... well it's your money in other's hands or sometimes in the shares you own directly. What your money tells us over and over is that we should be paying a CEO in such a way as to increase the value of the shares YOU hold. You and your proxies have told us over and over that if we incentivize her well, you in turn will do well. You never do ask about Warren Buffet's secretary, but you sure ask about Warren a lot. Now while we're down that path I'd ask Catholics who are passionate about this to look into their pensions and the pension funds of Catholic organizations. I have. Far too few of them draw any lessons from Catholic Social teachings and as a result the shares owned in companies are not held to account. If you want boards to listen, vote with your shares. One last point. Some of us try, really try, to bring these competing influences into some kind of harmony in our boardrooms. I believe in the social teachings and I try to live them. It's hard to do. Somedays I succeed and others, facing bankers and lawyers and yes, lawsuits for getting it wrong, I fail. But I try. Demonizing CEOs is fun and in specific instances, sometimes deserved. Ultimately though, this is a shared problem. You and I and the shares we own are the fuel in this system. I know that won't sell magazine copies or clicks online, but the truth is always messier than these kinds of hyperbolic analyses would have us all believe.
Michael Barberi
3 years ago
I was a senior officer of a Fortune 200 Corporation and am familiar with CEO compensation as well as Catholic Social teaching. While the above author makes a good point that CEO compensation is often 300 times the average worker compensation, it is misleading to imply this extra or excessive salary amount of CEOs is taken out of the salaries that "otherwise" would go to workers. Most large companies have tens of thousands of workers and sometimes more than 100,000 workers. Reducing the salaries of CEOs by a reasonable or significant amount will not move the average salary of workers very much. Spreading such reduced CEO salary over tens of thousands of workers will not materially change the average worker salary. More importantly, worker salaries are governed by competitive surveys of the salaries of similar workers across and within industries. Granted that small increases in worker average salaries in one company may attract good workers, but it is not clear how much this will mean or if such an increase is necessary if no other company is doing it. It also is a little naive to think that Catholic Social Teaching will have any significant role in the CEO compensation policies established by Boards of Directors because most corporations are not governed by a "Catholic" Board of Directors or are most CEOs Catholic. Justifying changing the compensation package of Catholic CEOs with a pluralistic Board of Directors based on one interpretation of Catholic Social teaching is not a practical solution. I do agree that CEO compensation should be significantly reduced but not because it will, ipso facto, result in higher average wages for workers. Nevertheless, any improvement in worker compensation would be a good thing.
Tom Kueny
3 years ago
I would like to ask Fr. Martin, SJ the same questions he asks of Catholics & Catholic CEO’s. So the question I would ask Jesuit’s and Jesuit Colleges is quite blunt: What do you want to say to Jesus when you reach the gates of heaven? Do you want to say that you took as much as you can (Tuition), even as much as the market would bear, because your board okayed it? Or do you want to say you accepted what you thought was just, and understood the needs of your fellow men and women, who may have worked even harder than you? The Jesuits run HUGE profit centers (Colleges/Universities) all over the country. The Tuition and Room & Board at most of their Colleges & Universities runs in excess of $55,000 per year! The Jesuit University system is flush with cash and the endowment at the Jesuit Universities simply does not warrant the greed & excess of a $55,000 per year tuition bill. The Jesuits and others in the college education business continue to drive our youth and their parents into unsustainable debt. I suggest that Fr. Martin, SJ & his Jesuit brothers take the lead on this important issue & follow Catholic Social Teaching. However, I doubt the Jesuits will lead the way. They will continue to take as much as they can in tuition because that is what the market will bear & because the board okayed it! Father Martin should expect Catholic CEO’s to cut their pay in half right after Georgetown, Boston College, Holy Cross, Fordham & all of the Jesuit run University profit centers cut their tuition in half.
Bobby Warren
3 years ago
Tom - I certainly think the Church should always evaluate how it uses its resources, and I'm sure that the Jesuits do this as well. But to describe any Roman Catholic university as a "huge profit center" betrays a fundamental misunderstanding of the fiscal challenges that any university (public or private, religious or secular) faces. I can assure you that any "profit" it going right back into the university and its students. After all costs are covered, any amounts left over typically go toward funding scholarships for students who cannot otherwise afford the quality education available at these institutions. Also, I'm sure Fr. Martin would love to describe for you the basic living conditions of a Jesuit house and how they focus very much on using their resources for the good of the community and the poor over their own needs.
J Cosgrove
3 years ago
So the question I would ask Catholics and Catholic CEOs is quite blunt: What do you want to say to Jesus when you reach the gates of heaven? Do you want to say that you took as much as you can, even as much as the market would bear, because your board okayed it? Or do you want to say you accepted what you thought was just, and understood the needs of your fellow men and women, who may have worked even harder than you?
I am sorry but even with Fr. Martin's business experience, this is a naive sentiment. First, God gave us human nature and within this nature is built the law of supply and demand based on basic human incentives. To ignore it is to ignore how God made us. So a CEO's salary or total compensation (most compensation is not salary) is based on these laws of supply and demand. If not, then that is what should be addressed and not the actual salary level. If somehow the system is rigged then un-rig it but let human nature play out in terms of this basic law of human incentives. The real question is not how much a Catholic CEO or any CEO makes but what he chooses to do with it. He may be able to do more good with his compensation than if it were instead distributed to employees or in reduced prices for purchase of the companies products. There are thousands of examples of very rich people who have profited by their business expertise donating their money in some way to the public or charities. God will judge them on how they spend their money, not how they made it if it was not based on illegal or immoral acts. I am all for good CEOs making a fortune because that is how we have progressed over the last 200 years to the point we are at now. Those who think that it does not take a special talent to be a good manager or entrepreneur, should think again. It is one of the more difficult jobs imaginable and it is a rare individual that is good at it.
Joshua DeCuir
3 years ago
I would be interested in seeing/reading the other papers or comments at this event to see if any of this discussion was contextualized. For example, this comment is not quite accurate: "we need to remind ourselves that the dollar slipped into the pocket of the CEO come out of the pockets of the person in the factory. Money in the corporation is finite. A corporation makes a certain amount of profits per year. CEOs and boards, when they are deciding on CEO pay are, in essence, then, allocating dollars." What this statement ignores is that the large bulk of executive compensation is actually in the form of non-cash compensation, such as stock options or restricted stock. These types of compensation are usually tied to some measure of company performance. Thus, the value of the compensation does not come at the expense of the worker, it comes from the growth of the company - something which theoretically ought to of benefit to both the executive & the worker. Furthermore, the growth in executive compensation needs to be seen within the larger context of the massive changes in our economy since the end of WW-II. So, many like to point back to the period when CEO-worker pay ratio was much closer. Of course this misses that this was a time of huge economic conglomerates, when firms were much more homogenous, & before the dawn of private equity & other economic factors that forced the break up of these conglomerates into separate firms - which also lead to higher shareholder returns. Thus, the issue of executive compensation is also tied to shareholder return & growth. We need to ask the question: would workers & shareholders be better off with lower executive compensation if it also lead to lower economic returns? Finally, just as one commenter pointed out that a relatively small proportion of firms accounts for the largest pay disparities - publicly-traded companies, it is also further true that there is diversification even within that small slice. Thus, the highest pay rates are within publicly-traded financial institutions. A lot of complexity in this issue.
ed gleason
3 years ago
Forget about CEO compensation and find out about the TAX FREE expense account living that accompanies the too- high salaries. Google former CEO of GE Jack Welch's divorce and how it reveals how he lived a luxurious life solely on the GM expense account dole. Manhattan condo. most meals from the 4 star restaurant on the first floor, limo, airplane, memberships in every club around.sporting events mags. newspaper. his door man tips nothing was too small or large for GM to pay.. I couldn't figure why he carried a wallet ....just like the English royalty ; And the fawning media called him the 'greatest CEO' until his wife found about his romance with a young reporter. . Also many claim GE and other Corps pay no or very little Fed income taxes, and why should they, when they can claim as expenses Welch's perks.
Bob Baker
3 years ago
And let's not forget those who are teaching students in Catholic primary and secondary schools. Their salaries, alone, range from 50-80% of their public school counterparts and their benefits range from zero to not much. When you hear a priest say that a female teacher will gain benefits when she marries, you know there is still sexism in the Church. (Catholic Social Teaching & Unions in Catholic Primary & Secondary Schools: Clash between Theory & Practice in the United States).
John Belanger
3 years ago
However, there is a piece of the puzzle that Fr. Martin is forgetting: While minimum wages might be justified because of minimum levels of sustenance, it's not wise to try to impose maximum limits, because those who have more than sustenance level could and should be giving much of their excess away. Fr. Martin writes that dollars "slipped into the pocket of the CEO come out of the pockets of the person in the factory." If so, that is NOT due to the mere fact that he has a large paycheck, but due to the CEO's selfishness. See the difference? We can't make the statement that large paychecks = selfishness. Actually, in most cases, the money garnered in a larger paycheck is dished out to buy goods that supports another factory! Or, consider this: How does one know that the executive making $800K doesn't give to the neighbor who is below minimum wage (either directly or through an agency)? I agree that it might not be happening as often as it should, but the degree of charity should be what the executive answers for on Judgment Day. He doesn't need to answer for it right now in the public square with the feds monitoring the ledger.
JAMES BARRY
3 years ago
There is another element to this that I haven't seen mentioned yet. In large corporations it is common to have a multitude of other officers and executives beyond the CEO whose compensation also is very large in comparison to that of the workforce. I worked in a major aerospace company with over 120,000 employees that had more than 200 such executives, many of whom were making well in excess of $1 Million per year in total compensation. If the hundreds of $ Millions in compensation to this executive cadre theoretically were distributed to 120,000 employees there could be a measurable impact on average worker pay. I say “theoretically” because the structure of that industry’s cost accounting and the competitive business environment were the determinants of employee compensation. Little of the executive compensation could have been reallocated to worker salaries.
Michael Barberi
3 years ago
One other important detail. CEO and senior officer executive compensation consists in a large part, in terms of its total monetary value, in stock options. The level of base salary is a small part of total compensation, which also includes the value of benefit plans and cash bonuses. It will take a total revamping of U.S. industry compensation practices and a significant change in compensation philosophy to significantly reduce executive compensation and apply the reduced monetary value amounts to increase average worker salary. There are a host of complex issues that must be balanced and considered and this article does not touch upon them. Most importantly, it is naive to think that the level of executive compensation is the cause and problem associated with average worker salaries. Nor is it immoral for companies to pay CEOs and other senior officers significant compensation for company performance that increases the retirement savings of average workers who invest in their company's stock and the stock of other companies. This does not mean that executive compensation should not be changed. Nor does it mean that average worker compensation should not be provided some stock options or participate in stock ownership plans.

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