Market values are to values as military music is to music.
Never mind.
Gregg Easterbrook had an interesting take on this. Exorbitant compensation packages for CEOs are explained as being the result of a competitive market, with lavish bonuses and such required to lure top talent away from slightly less lucrative offers with other companies. But the members of boards of directors are often CEOs themselves. Even without friendship or collusion with the people whose salaries they approve, they have an interest in seeing the market continue to rise to increase the competitive pressure for their own compensation.
Personally, I believe those pay packages are an abomination.
Financially and professionally, I believe they are fair and correct because, as CEOs make more money, they are willing to spend more money. However, as my boss has said, nobody’s cheaper than rich people, I go back to my personal belief, but with the hope that some of the money my beliefs cannot stop is filtered through my wallet.
I always made a terrible socialist.
I do not believe that it is futile to try to rein in CxO salaries. I do believe that it would be counterproductive for government to interfere with the process. Any proposed legislation would either be baseless (except as a “punish those SOBs” action which I do not believe should be a role of government) or it would be corrupted by the lobbying process, (who has the funds to send in the most lobbyists?), so that, like most of the “save the family farm” legislation that has punished family farmers while adding profits to agri-business, it would be corrupted to punish middle managers or small business owners while giving more to the CxOs.
I do believe that it could be controlled if the actual stockholders, (too frequently dominated by insurance companies and pension and non-profit institutions that have delegated their “oversight” to small agencies that are not interested in providing genuine oversight as long as the stocks do not bottom out), took an interest in demanding accountability.
It is possible that some creative legislation that focused on demanding oversight or keeping corporate oficers off compensation boards might have a salutory effect, but caps on compensation by law are just not going to be effective (or even fair).
We will probably see the high pay stuff decline as companies are taken over by Private Capital firms - they will not waste money on boosting the ego of CEO of subsidiaries that they wholly own.
Lots of good comments here, but I also want to point out what I call the churn effect. It’s the idea that, no matter whether a Big Ol’ Company is succeeding or failing, it will shell out large for CEO compensation:
Company is doing well. Obviously, reward the CEO.
Company is doing well but CEO retires. An internal hire already has a good package on which to build. For an external hire, the board will hire the “best” to maintain the success.
Company is not doing well; long-standing CEO is not blamed. Whether the reasons are good or bad, a CEO who is not blamed for failure will continue to receive the high compensation s/he “deserves.”
Company is not doing well; long-standing CEO is blamed. Here things can get ugly, with the CEO fighting to remain, often with many resources at his/her disposal. The CEO may have a contract that must be bought out at a high price, or there may have been a golden parachute built into the contract.
Once the CEO is gone…
Company needs a turnaround, hires new CEO. Of course, they’ve got to hire the “best” in order to effect the turnaroud! Plus, there is a lot of “risk” involved, so the new CEO will only sign on if a very nice golden parachute is provided as well.
In short, if the company is doing well, pay the CEO a lot. If the company is doing poorly, fire the CEO if you can and pay someone well to effect a turnaround. No matter what state the company is in CEO pay remains high.
CEO comp is driven more by cultural forces than market forces. The idea that boards are trying to make the most efficient use of their money is sheerest nonsense, which both the raw facts and any experience in a large corporation will reveal.
Pay parity cuts both ways. If VPs are pulling in $1M apiece, a board would not, could not hire a CEO for $500k because the person was talented and willing to work at that price. Primate psychology alone dictates that the CEO must make more than his/her direct reports.
Why do most doctors and lawyers drive nice cars and live in nice houses? To demonstrate their success and their place in the pecking order, of course. It’s no different with corporations. A big corporation that can’t afford, or chooses not to afford, a powerful, expensive CEO loses prestige.
Add to the above what other posters have already pointed out: Powerful, expensive CEOs are not so very numerous. They know each other, and, ultimately, protect their own. Again we return to primate psychology.
What’s worse is when family-owned companies go public but the family still retains control. I worked for a Japanese company like that. Two brothers “owned” competing fiefdoms in the company (and they weren’t the CEO, who was not related but had his own for-show kingdom, much like Tennou himself), and management was generally making a nuisance of itself and creating a truly ugly corporate culture. But these guys weren’t making a lot of coin, probably under $200k apiece, so you can see cultural differences at work.
For a local example, how about the Marsh supermaket company. A veritable nepotistic empire, with all manner of family members feeding at the trough. They ran the thing into the ground, and Marsh were acquired last year.
Market forces can be said to work in these instances, but only in the crudest way, as CEOs have so much power that they can destroy a company, or hamper its growth, and everyone knows about it but no one can do anything. Look at what Carly did to HP. Look at how Eisner rode and rode Disney for years, untouchable.
Further, a bad CEO can reduce the profitability or growth of a very profitable or fast-growing company and still take the credit for what profit or growth remains. Drug companies can often be this way. When they have blockbuster drugs, they are so profitable that they are virtually unsinkable, so a CEO can go nuts without any accountability. I worked for a moderately successful drug company in Japan just filled, filled, filled with deadwood. The company had all kinds of crazy, unsynergistic divisions and sections and whatnot (that’s pretty standard for a Japanese company–deadwoods and overlapping fiefdoms–and this CEO was not particularly bad, but the point still stands that there were no forces at work to make him make things better).
The previously-mentioned Japanese company had great engineers, salt of the earth type people, who made a niche product of very high quality that sold well. Still, all the management ever did was dick around and cause trouble. This was the cattiest, most gossipy, most malignant bunch I’ve ever seen, yet they spent roughly $10M on a “Values” program touting how nice the company was to all its stakeholders, blah blah blah!
If that shit doesn’t make you cynical, friends, I’m not sure what will. :dubious:
I agree that many public company executives are drawing unreasonably high salaries. But the fact is, it’s pretty easy to find out how much they’re making (particularly now that new disclosure rules are now in effect), and I simply choose not to invest in those companies that pay what I believe to be unreasonably high salaries. It’s harder to control my 401k or pension fund investments, but by no means impossible. And pension funds are increasingly active as corporate governance watchdogs.
Don’t like compensation committee interlocks? Don’t invest in companies that permit them. How can you know? Look at the proxy statement; specifically, the section entitled “Compensation Committee Interlocks and Insider Participation” that is included in every single one.
If more people would pay attention to where their money is going, it really would be possible to make a difference. And it’s not that hard – the information is very readily available to anyone who cares, and one could extract the relevant information regarding a particulary company in perhaps half an hour. Pension funds and similar institutions really do listen to investor concerns about corporate governance matters, but I suspect most investors never express such concerns, except on message boards and in casual conversation with like-minded friends, and very rarely act on them.
In general, if investments are doing well, we don’t care very much about what the executives are making; if they do poorly, we whine a little, but don’t take any meaningful steps to stop or prevent malfeasance.
There really are plenty of companies out there to invest in. If you don’t like the practices at one, pull your money out and invest it in one you find more suitable. The little bit of legwork necessary would certainly not deter anyone who is truly concerned, and if enough people are as concerned as they purport to be, practices really will change (as disclosure practices and requirements already have).
“Enough people” in the form of pension/mutal funds indeed will.
There have been hundreds of shareholder proposals by pension funds in the last couple of years, and many companies are changing practices, particularly with respect to the ways in which directors are elected. United Brotherhood of Carpenters and CalPERS are particularly active.
Mutual funds are particularly vulnerable to market forces (assuming a market in which shareholders – including individuals – choose to monitor their investments). Mutual funds must disclose their investments and their proxy voting policies, and they are also readily accessible to anyone who wants them. I suspect that many people would be surprised at how easy it is to find this information. Perhaps many people are intimidated and don’t believe their input and investment decisions would make a difference. Or perhaps it’s even easier to complain about these concerns without bothering to act on them, particularly during times when our investments are doing well.
To put a couple things in perspective:
Verizon market capitalization (total value of all their stock) is $110 billion.
Verizon’s operating expenses amount to $39 billion. $20m is a rounding error.
Verizon has 242,000 employees. If you eliminated the CEOs $20 million salary, that amounts to about an extra $80 per employee.
Now I don’t know if CEOs are overpaid. They make a lot more than me but then again, I make a lot more than a minimum wage employee. I do know that at least in the case of Verizon, their salary is insignificant when compared to the size of the company. They may make a great deal more than the average employee, however even if you paid them nothing, it would not materially affect people’s wages. Maybe it’s not “fair” that Verizon employees have to slave away working for what is peanuts by comparison. Who knows?
We’re really only talking about a handfull of CEOs for the largest companies here anyway. There are plenty of small to midsized companies where the company simply cannot afford $20 million CEOs.
And let’s not forget that we only hear about the disasters (not that GM doesn’t qualify as one…) Some of these megabucks CEP’s earn every penny: a good one in the right place can make as many billions of dollars as a bad one can lose. What I think the issue here really amounts to is that Good Ol’ Boy networks in these companies tend to pay themselves a lot of cash. Gm si a big case in point: their management is relentlessly inbred and many have no experience outside the company at all. Their whole career is built at that one company. This does mean they know its business well (a plus in fat times) but they are also committed and tied to the existing business practice and structure (a serious flaw in lean times).
I agree. Corporations are not government entities, they are chartered by the government but they are designed to pool resources to maximize the creation of wealth (even in NPOs this is the goal, just the use of generated wealth is ultimately different.) That’s why corporations exist and it’s furthermore improper for the government to try and tell corporations how they can best create wealth.
If a corporation decides paying a CEO $60m a year is a good way to insure the creation of wealth, that is the business of the Board of Directors and the stockholders, not the business of the government.
We’ve had a few threads like this and I’ve not seen any compelling arguments justifying government stepping in, and it to me seems highly obvious the people who want to put caps on salary do so out of a vindictive dislike of rich people.
Personally I don’t like bloated CEO salaries. I would prefer a large but reasonable salary for CEOs of most major corporations. I think the CEO of say, Wal-Mart or General Electric should draw a salary of around $400,000-$600,000 per year. I think after that, the entirety of his compensation should be linked to the performance of the company, I’d be fine if a CEO made $50m a year if the overwhelming majority of that earning was not salary (and other such benefits) but was rather the product of improving performance of the company.
:dubious: So, not liking astronomical CEO salaries and describing them as “bloated” doesn’t indicate “a vindictive dislike of rich people” on your own part? You can be as opposed to bloated CEO salaries as you want, as long as you don’t advocate actually doing anything about them?
That seems silly to me. Personally, I agree that there is probably no effectively practical or fair way to legally mandate that CEO salaries be kept to the more modest level that you would prefer. But reasonable people may disagree with me on this. If two people agree on the existence of a particular economic problem but disagree about whether it should be addressed with legislation, I’d say that that probably reflects their views on the efficacy of legislation, rather than their personal motives for being concerned about the problem.
It would be equally silly for me to claim it’s “highly obvious” that somebody who thinks low-income workers should be paid a decent wage, but opposes minimum-wage laws, must be doing so “out of a vindictive dislike of poor people”.
I sure as hell can. My school’s football team was one of the best in the nation, they actually won the national championship one of the years I was attending. Tuition was deregulated a few years ago and has gone up every year since.
I understand we weren’t paying any coach’s salary via tuition, but we sure as hell didn’t get anything back from the sports programs - in fact, students were probably one of the biggest fundraisers for it.
I admit you might be essentially right, the school undoubtedly earned money from the championship, but I have no doubts the shit-for-brains administration either wasted it on nonsense or put it back into the sports program, and a chicken-feed percentage actually made its way to the school’s upkeep, the faculty or the students.
I’m torn about the entire CEO thing. They make an exorbitant amount of money, but splitting the job among 10 people is likely to put it in the toilet. Dealing with a committee is like talking to one big confused idiot. The bigger problem IMO are the bloated megacorps that can easily afford to pay the CEOs.
If that were true then we would have CEO’s from India, China and other rapidly rising nations driving down the pay levels.
CEO wages are determined by board members who often serve on multiple boards. I think it would be possible to make the case for breach of fiduciary duty to stockholders if a quid-pro-quo could be established.
I’m as big a fan of free enterprise as they come but from an investor standpoint I expect results. I don’t know what the bottom of the scale is for a CEO but that should be the wage set by board members for a business (like Ford) that is losing money while competitors gain.
This has nothing whatsoever to do with the efficacy of legislation, it has to do with what I feel is the proper role of the government. We live in a FREE MARKET economy. The government should have no right to interfere with the internal financial management of a private corporation (by private I mean a non-governmental business entity whether it be publicly traded or not.) I don’t think my neighbor should eat himself into obesity, I think it’s a problem if he does. I likewise would firmly oppose legislation designed to stop him from doing so, the government has as little right to step in there as they do with CEO salaries. They are private, non-government entities and they ought to have the ability to manage their finances just as much as my next door neighbor has the right and the ability to manage his own diet.
Personally I think workers should be paid a fair wage and completely oppose the minimum-wage laws and believe, just like rent control, they do more harm than good and only look good to untrained eyes.
I’d like to see someone give a compelling reason why it is the business of the United States government to put its hand into the management of corporations. Where does the line get drawn? Okay, this CEO makes too much money thus his salary is a bad decision and the government is going to put a cap on it. Ah, this acquisition is likewise a bad decision, so the government is going to stop it. This supplier is better than that supplier, so the government is going to go ahead and change suppliers for you.
Individuals and corporations alike have to be aloud to make decisions for themselves, both good and bad. It’s arguably the business of the government to provide a minimum wage to insure that the lowest paid citizens are capable of earning a living wage, however there’s no associated public interest in establishing a maximum wage. In fact, a maximum wage would work directly in opposition to the public interests by moving the United States further towards a planned economy, which is economic disaster.
Do proponents of a maximum wage intend for the law to apply exclusively to salaries, or to all earnings? If it is just to salaries then obviously individuals would just be compensated in other ways. If it is all earnings, you’d be destroying capitalism because you would be denying stakeholders their earned rewards. A guy like Warren Buffet has no reason to make large investments if there is an absolute ceiling to how much of a reward he can reap–it’s one thing to tax those earnings and an entirely different thing to put an absolutely ceiling on them.
You haven’t established causation. Universities are huge creatures, just because one part may make a profit doesn’t mean you can expect the entire university to lower tuition.
Sports programs create direct profits which, first and foremost are used to cover the expenses of the sports programs, profits in addition to that are likewise very rarely diverted to the rest of the school, but that isn’t the point. A healthy sports program gives a school attention and brings in bigger alumni contributions (which are essential for the running of almost any large school, be it public or private)–contributions which come in the form of scholarships and direct contributions to the school’s academics.
For example the same booster who is paying the $2.5m buyout for Michigan’s new head basketball coach has also given something like $100m to the school’s business school.
Why is the word “purportedly” so prominent in this last paragraph? This data is part of an SEC filing, I don’t see why you think Ford is going to commit fraud by lying to the SEC . Of course, there’s apparently no doubt that the $28M figure is entirely accurate, even though it’s from the same filing.
$18M of this was money spent to lure him away from his existing (extraordinarily lucrative) job at Boeing. This is part 1 of why CEOs get paid a lot. None of them fall off the back of a truck and become CEO of a Fortune 500 company. They are all wildly successful and highly compensated businessmen before being thought of as CEO material. When they’re tagged for a CEO job, they’re being asked to leave a job where they are secure, successful and well compensated, for a new job. Only an idiot would take the new job without some kind of assurance that they will not wind up poorer as a result. So, they negotiate things like signing bonuses and golden parachutes.
Back to Ford, another $9M was spent to set up his performance based compensation. They didn’t give HIM the money, they gave him stock options and set up stock bonus plans that will be worth considerably less if he doesn’t improve the company’s performance. I hazard a guess that this will be worth WAY more than $9M if he does a good job turning Ford around, so you can complain when he earns $50M on those options. This is part 2 of why CEOs get paid a lot. If they do a good job, a company can go from a dying hulk, who’s best prospects are a buyout for 20 cents on the dollar to a profitable, effective company earning the shareholders billions of dollars in the span of a few years.
I used the word “purportedly” because those sentences relate to intent and purpose, and I cannot get inside the minds of those who “purportedly” have those intents and purposes. IAAL, and, in fact, IAAL who reads SEC filings on a daily basis. However, I have not read this filing. Perhaps if I were to do so, I could remove the word “purportedly.” But there is no shortage of examples of post hoc justifications in the world of executive compensation, and until I know this isn’t one, then the justifications are purported.
The rest of your post seems dedicated to the idea that there is nothing to be skeptical about here. Whether he deserves it or not is, of course, debatable. But there’s still reason for skepticism about the rationality of this package. (Ford has made other mistakes; why shouldn’t this be one too?) That his compensation package has received widespread coverage suggests that I am not alone in finding such reason.