Ford’s new CEO, on the job since October, has “earned” compensation worth about $28 million. (See here.) Ford lost $12.7 billion last year.
There are some circumstances that, purportedly, mitigate the superficial excessiveness of his compensation. For instance, a large part of it, purportedly, compensates him for options he had to give up when he left his former employer, Boeing. Nevertheless, it is an awfully large chunk of change for the new guy, who hasn’t demonstrated anything yet, and is at the helm of a company that is hemorrhaging money.
Similarly, Verizon’s CEO earned over $20 million last year, and more than $110 million over five years, despite poor corporate performance. (See here.)
In this country, we like to trust the market to determine a person’s worth. These (and countless similar) numbers appear so out of whack, though, that they raise the question of whether something is wrong with the market. Are these people being valued accurately? Or are they overvalued? If so, why? Perhaps because of a price-fixing cabal of some kind? Or is there some other inefficiency being ruthlessly exploited here?
One of my former bosses held that the CEOs were paid what they’re worth – but he was a CEO himself.
A book I read circa 10 years ago claimed that the worldwide reach of talent pools now made it possible for world-class talent to find these jobs (and vice-versa), and so they are, indeed, finding their correct pay level.
I find it hard to believe that these pay levels are justified – and that’s not just sour grapes from me. There is, I think, a lot to the argument that such compensation is determined by Boards of Directors who are themselves well-compensated, and see more than dollars or stock value in the pay that’s been set. It sends a message as well. Others have noted the significant disparitry between CEO/worker wages not only with respect to the rest of the world, but also to our own country. It seems grossly disproportionate.
It;'s at its worst when such an officer gets high pay at a time of finacial hardship or even crisis for the rest of the company. There have been plenty of examples from places like Enron, but the one that still rankles me is the case of Polaroid, where management gurus who came in for a brief period ended up taking huge pay packages, while people who had labored for decades – their entire lives – for the company saw their benefits evaporate.
A company that continues to pay its CEO millions while it loses billions won’t last long. Ultimately, it will run out of money with which to pay multi-million-dollar salaries, lay off its work force and, in the ultimate efficiency, close its doors. It will be replaced by one or more smaller companies doing something similar but more efficiently because it/they will lack the wasteful resources; workers will be re-hired and re-trained in the new way, and the cycle will continue. Thank you, Toyota, Honda and Nissan for proving that American free enterprise works.
An efficient market would suggest that the CEO is paid what he’s worth. That’s probably the biggest bunch of BS around. Typically, the Board members that approve the CEO’s pay are his buddies. He might even be on a Board that approved their pay. Alternatively, they could be victims of hype. The “average” job market is inefficient (on a job-by-job basis). The executive job market even moreso. But these are nothing compared to the CEO market, which is indeed an atrocity. It’s basically a means of shareholders subsidizing already wealthy individuals.
The issue is less how much CEOs are paid but how their pay arrangements are approved. The board of each public corporation must approve the corporate officer package. Unsurprisingly, CEOs all sit on each other’s boards and routinely approve each others’ compensation packages. As long as such enormous decisions are made by so few and self-interested people, it is unlikely that anything will change.
Paradoxically, the full disclosure of executive compensation was the biggest driver in massive CEO pay increases over the past decade or so. It has created a compensation arms race that has not abated.
I think one factor is that when you’re rich past a certain level, money means nothing except as a means of keeping score. So CEOs don’t arrange gigantic compensation packages for themselves out of greed, but rather out of ego…the more they are compensated, the more important the CEO. It doesn’t matter how much you make, only that you make more than everyone else.
I agree with all of the above, but in addition, someone becoming CEO of a company should be doing it for the challenge, and because they think they can make the company better. I suggest that if a CEO will take the job for $70 million a year, but reject it for $65 million, that is not a CEO you want.
I don’t mind CEOs making money off options so much, but they should be pegged to beating industry averages, not just the market. An old General Manager of mine said that any manager looks like a genius in a rising market. A manager who loses less money than competitors in a crash deserves more credit than someone who makes an average amount in a boom.
Because the justification for the minimum wage has absolutely no relation to the (non-existent) justification for the maximum wage?
Your suggestion is just as ridiculous as saying “Well, we punish people for killing people - why don’t we punish people who let other people live as well?” You should not make policy decisions based merely on symmetry.
Ditto. The market will take care of underperforming and overcompensated CEOs itself.
Some inefficiency is inevitable, but what do you care if Mr. Lucky CEO gets a few extra million in his paycheck? It’s not like the alternative is giving the whole thing to you.
For that analogy to work, we would first have to establish that letting people live is an abomination, as some would say paying multimillion dollar salaries to CEO’s is.
That wasn’t the basis for my statement. IF enough people are disgusted by obscenely high salaries, then people can draft legislation to do something about it.
The comment was offered from the lightest of hearts.
Maybe if underperforming CEOs knew they’d lose a few million bucks, they’d try harder? And the market does nothing to them. If their boards turn on them (not very frequent) or Gretchen Morgenstern writes about them, then maybe. Internal directors have been named by the CEO. External directors who push for performance might worry that their boards will do the same thing. If you read the HP story, those making trouble weren’t CEOs, but retired venture capitalists.
Seriously the “maximum wage” idea has all sorts of flaws, namely, how do you define “wage”? Sure, it’s easy to dictate that a number on a paycheck never exceeds a certain number. But that just means that compensation shifts to other forms. Is a company secretary a form of compensation? It sure is. How about two secretaries…one to do office work, another to pick up your drycleaning and get your coffee. Do you need a company car? How about access to the company jet? A company valet? Lavish health care? Access to the company vacation house? Invites to the company skybox for the big game? Lavish champagne and caviar company parties? Not to mention things like stock, stock options, and so forth.
Or take actors. Actors negotiate a certain amount of pay acting in a movie. And they get royalties every time the movie is shown. But the top actors can negotiate a percentage of profit from a movie. Why should the studio get to keep everything?
Or consultants. You can cap wages, but can you cap how much a company is allowed to pay outside companies for services? Company A needs a manager, so they hire company B to manage the company. Company B consists of one guy who owns company B. Company A isn’t paying guy B a wage…they pay company B, and since guy B owns company B his company makes money.
Most really wealthy guys aren’t wealthy because they are paid high salaries, they are wealthy because they created, control, and own very valuable companies. Bill Gates is worth 30 billion because he owns X% of Microsoft, and Microsoft is valued at Y gazillion dollars, and his percentage of Y is worth 30 billion. Yes, Bill has drawn a salary for working at Microsoft, but he didn’t get to be the world’s richest man because of that salary. What would happen to Bill’s Microsoft stock under a maximum wage program? Would he be forced to liquidate?
While I agree that a salary cap is not a good idea, it’s not like we don’t have champagne peeing Davids already. Greedy CEOs will demand both perks and big salaries.
Bad example. Actors don’t appoint studio heads. (Except for Chaplin, Pickford and Fairbanks, that is.) Actors who can’t draw in people soon get their salaries cut, far faster than CEOs who lose money do.
Another bad example. I don’t recall seeing Microsoft execs on the list of highest salaries. Bill’s stock is another matter entirely. In my observation, founder CEOs are much more reasonable in the area of salary than those hired. My CEO took a major salary hit after the bubble. Don’t cry for him - he got plenty from options still, but he set an example that if the company did poorly, his salary and bonuses should take a hit too. I rather expect that if Hell froze over and Microsoft lost money, you’d see Gates and Ballmer forego their salaries.
So I agree that capping salaries is bad (increasing taxes on them, though, is good) but your examples are not good reasons for it.
To your first point, obviously not. For one thing, the high correlation between CEO performance and company (stock price) performance is dubious to say the least. If the link exists, you should see CEO compensation tied completely to stock price growth. Even if you dispute that point, there is even less of a probablility there would be a correlation between increasing a CEO’s salary and a higher stock price. Do you think increasing Eisner’s salary by $10 million would increase Disney’s value by $10 million? Not bloody likely.
The Board of Directors is supposed to act as an agent of the shareholders. The few extra millions that Mr. Lucky gets comes directly at the expense of the owners of the company.
CEO salaries are capped, effectively. Anything over $1 million is no longer written off as an expense. This feel-good legislation is what led to…
CEO bonuses being written, along with long-term incentive plans. These are based on a variety of factors supposedly critical to the firm’s success. In the end, however, it was realized that the most important thing to shareholders was…
Stock price appreciation! So we started making option grants to CEOs. These were worthless at grant, and only gained value if the stock price rose. Sadly, even if you just kept up with the market you did very well. Under the old accounting rules options were effectively free from an expense basis, but nailed you if you put in performance rules. So nobody did performance rules.
When you see that a CEO “made” tons of money in a given year, go look up the data in the proxy statement (DEF 14A on the SEC website). You might find that he finally exercised options granted 5 years ago. You can see if he gets options every year. Some CEOs are required to own a percentage of the firm, or to keep stock in equal value to a multiple of their salary.
As for CEO pay, it comes from the Compensation Committee of the BOD and is then voted on by the BOD. The BOD is supposed to have a certain number of independent directos, and incestuos relationships are frowned upon by groups like ISS (Institute for Shareholder Services). The large mutual funds and pension funds are also now starting to crack down on highly paid, yet poorly performing, CEOs.
Your profile says you are a manager. Let me assume that you make $70k/year. I think someone becoming a manager should be doing it for the challenge, and because he thinks he can make the company better. I suggest that if a manager will take the job for $70k, but reject it for $65k, that is not a manager you want.
There is no reason, other your personal taste, to say that any given job should be done simply “for the challenge”. If that were so, we could pay everyone the same and have a healthy, functioning economy.
As for the OP, there is a certain amount of chumminess between CEOs and their boards, and one could imagine setting up corporate rules to break down that chumminess without interfering with “the market”. Still, executive pay is disclosed in public corporations, and people are free to invest or not invest in companies if they think that is an issue. Maybe the answer is to mandate that investors be able to understand the financial details of the companies they invest in rather than mandate that management behave in any particular way. (Just pointing out that there are two ways of looking at this “problem”.)
A good analogy is college football coaches and their rising salaries.
Alumni associations, school boosters, university presidents, and the boards of trustees across the country at major institutions are increasingly shelling out multiple millions for a guy to head a school’s football program. No one can deny that in general a successful Division IA football program creates wealth for a school, both through merchandise and ticket sales and conference payouts but also through increased alumni interest in the school and donations.
The same thing fuels rising coaching contracts that fuels rising CEO pay. Boards of trustees want the best, because the best means wins, and the way you attract the best, in general, is to offer higher pay. The way to attract the best at a large corporation, is to offer higher pay. The board of directors want to maximize a companies profit for the stockholders (owners) of the corporation, so they dangle lucrative salaries and compensation to corporate executives, to get the best you have to be willing to pay competitively, and the more companies out there willing to pay big, the higher the pay has to go to attract the best executives.
You could put a salary cap in, definitely in the NCAA (where it would be more feasible than in the corporate world) but what would that really achieve? Would you have a lower quality of coaching in the NCAA? Not really, guys like Bobby Bowden love their millions, but they’d still be coaching if their salaries were capped at say, $500,000. What a salary cap would do is stifle competition, once a coach was being paid the salary cap, it’d be harder for other schools to attract him away (it’d be similar in a corporation, too.) So what would probably of course happen isn’t more responsible spending from schools (or corporations) but they’d find ways to make end runs around the salary caps with other forms of compensation which are harder to track or regulate.
I know it’s probably unrealistic to expect otherwise, but it is pretty sad that any attempt to curb the destructive greed of the mega-rich is ultimately dismissed as futile. Maybe such attempts are ultimately futile, but it still makes me sad that we don’t expect a basic level of decency and fairness from these people.