CEOs vastly overpaid, study suggests
U.S. researcher used chemical engineering equations for calculations
Last Updated: Wednesday, November 4, 2009 | 4:05 PM ET
CBC News
Venkat Venkatasubramanian, a professor of chemical engineering, displays some of the mathematics behind his new theory to determine fair CEO pay. (Purdue University photo/Andrew Hancock)Chief executives in 35 of the top Fortune 500 companies were overpaid by about 129 times their "ideal salaries" in 2008, according to an analysis by a Purdue University researcher.
Venkat Venkatasubramanian, a chemical engineer, said he's devised a new way to calculate the true worth of top CEOs based on equations found in chemical engineering.
His paper — What is Fair Pay for Executives? An Information Theoretic Analysis of Wage Distributions — was published Tuesday in the online open-access journal Entropy.
Fair pay for an average S&P 500 CEO should ideally be in the range of 8 to 16 times the lowest employee salary, according to Venkatasubramanian's calculations.
By contrast, average CEO pay ratios were about 11-to-1 in Japan, 15-to-1 in France, 20-to-1 in Canada and 22-to-1 in Britain in 2006.
Since the 1970s in the United States, the ratio of CEO pay to the lowest employee's salary has gone up to as high as 344-to-1 from about 40-to-1
Last month, the U.S. Federal Reserve announced a plan to eliminate excessive pay packages that might encourage bankers to take reckless risks, and the newly appointed U.S. pay czar, Kenneth Feinberg, has announced plans to reduce executive pay at companies that received the most federal bailout money.
Venkatasubramanian said it was not so unusual for a chemical engineer to dabble in economics. He basically took the same rules to govern statistical thermodynamics and applied them to economy.
