What are the reasons behind this? What are the ramifications? What can be done about it?
I think the reason for this is that for big corporations (or those looking to be big), the CEO is viewed as the most important piece of the puzzle. They’re treated like some magical potion to fix any company, if they just find the right one. This is why you see the same CEOs being passed around, sometimes tanking multiple companies before no one is willing to take a risk on them. You have to view them like athletes or entertainers. There is a limited number of CEOs that are viewed as qualified, so simple supply and demand creates huge salaries and other ridiculous benefits for CEOs, because the board views “that guy that they must have” as having no price tag and in a competitive market where other boards want that guy too, this is where we have gotten to.
Ramifications? I don’t know that their are any. I think most boards are smart enough to not tank their companies on a CEO comp package, but if they are, the company goes BK and they lose their compensation as well. Also, there are so few CEOs that are really pulling in such huge comp packages, that I think this topic is totally over analyzed. Does A-Rods contract have anything to do with what they pay the food vendors? Does a gaffer expect more because Tom Cruise is making $20mil a movie? I think it’s silly to compare CEO to employee salaries as nearly all employees are a commodity/interchangeable product and right or wrong, CEOs are viewed as a specialty, luxury item that are in very limited supply.
Its the way it should be, nothing can be done about it. The point of a company is to make money. The point of a publicly traded company is to serve the desires of the majority shareholders.
Let me repeat that fof emphasis: The point of a publicly traded company is to serve the desires of the majority shareholders. Its not to serve the customers, its not to serve the employees, and its not to serve the minority shareholders. When you realize that the shareholders are in fact the company’s primary customer, it becomes easier to understand
If the shareholders think a high priced CEO will make them more money, then they will hire that person. If they think the high priced CEO will not maximize profits they won’t be hired.
Seems pretty simple. The best way you can help solve the problem is to be a highly skilled and desirable CEO and refuse to be paid the market rate of someone of that skill set.
I think the other reason the salaries are so high is where people are being hired from and their competition for the job. Basically VPs are making 600+ per year so to even get one to take on a bigger role you’ve got to pay them more and since CEO salaries are public you don’t want your successful CEO to be stolen by a better paying job so you pay market rate as a minimum and then since when you higher a guy it’s because you think he’s better than average you pay more than average wages. In the end it just keeps ratcheting up what a CEO is worth.
The big problem is the incestuous relationship between CEOs and boards in general; in many cases, it’s the worst sort of old-boy network.
I suspect that it also cuts back on qualified non-CEO types being promoted into those positions, because boards tend to hire someone’s buddy who was a CEO somewhere else, instead of promoting the guy right in front of them who’s not part of the club.
But has something changed over the decades that has allowed this phenomenon? I doesn’t seem to bother the few folks that have responded to this post but many (including myself) find it troubling.
There’s a self-reinforcing system behind spiking CEO pay to astronomical levels. Rich guys vote to put each other on the boards and CEO spot of various companies, then vote to keep raising other rich guys who are in CEO and similar positions salaries higher. When pressed on why they pay so much, they point out (like Oredigger77 said) that other companies are also paying high salaries, and that they can’t actually pay less. Also, they don’t actually need to own that much stock to be a majority shareholder - you only need to be 51% owner of a holding company that owns 51% of a holding company that holds 51% of a holding company that holds 51% of a company’s stock to be in complete control of it, which requires a lot less capital up front. Obviously it’s not normally a single holding company with a bunch of 51% holdings, but a chain of various companies with various percentages, but you still end up with disproportionate representation.
Actually, a large part of the CEO pay has to do with tax laws that were meant to level the playing field.
It used to be that CEOs got a large paycheck. Then the tax laws were changed so that stock options were a better form of compensation. In 1993 the tax law was changed so that executive compensation could only be written off up to 1 million if the compensation was not performance based. So the CEOs, being generally smart folks, went for lower salaries and more bonuses and stock options, which are performance based. Link (warning, pdf).
The options gave the CEOs a large interest in increasing the stock price. As the stock price rose, so did they money they took home from the options.
Slee
I’m quoting myself from a post I made in September of 2015 in response to a question from Omar Little about which companies had incompetent robber barons at the helm
[Quote=Bill Door]
Ooh! Ooh! I got one. Jeff Immelt presided over one of the greatest stock collapses in history. From 2002 to the end of January of this year GE market capitalization dropped from $396 billion to 261.1 billion. The stock price dropped 61% in his first ten years.
Oh, but surely his compensation reflects that, right? Well, last year he made $18.8 million dollars. That’s $36.77 a second, every minute of every day for the whole year. Waking, sleeping, scratching his balls, pissing into his gold toilet, $2,150 a minute. You’d like to think tanking the stock price by that much would have some effect on compensation, but no. $7.8 million of that compensation was a bonus. GE stock price declined by 12.8% in 2014, while the S&P index rose 12.7%, and he gets a $7.8 million bonus? on top of his $6.2 million in stock awards and options and his $3.75 million base salary?
Because where the hell else can we find someone to run the fucking company into a ditch for that kind of money? You know, there’s a saying in investing that you should invest in companies that are so simple that an idiot can run them, because sooner or later one will. If Jeff has done nothing else with his life, he’s proven that adage.
[/Quote]
Bolding mine
I easily could be wrong but, I don’t think it was always this way. The point of any company was to grow and produce a profit. If it was a publicly traded company then the shareholders benefited from rising stock prices and or dividends. This model potentially benefits everyone from the shareholders to the employees.
The currently fashionable model of business is more likely to benefit the C-level employees and the shareholders. Pretty much every one else loses. The employees get no benefit from being good at their jobs and being loyal. The consumer gets no benefit from a company that they can trust. The town that company is in cannot rely on it. But a CEO will make a lifetime fortune on the year he spent dismantling a company that spent decades growing.
Yay.
OK, I’ve never taken even a basic Econ or business class, so be nice. This was how I believed business was supposed to work. Or as Trump would say “That’s what I heard”.
A while back I remember seeing a chart that showed how inter-connected a lot of high-priced CEOs and Board Members of various companies were. I googled a bit for it, but so far I haven’t run across it. Anyone else remember this chart (and know where to find it)?
“Shareholders” basically means owners. So a privately owned company that makes a profit literally sees that profit divided up among the owners in proportion to their ownership stake.
Owners (i.e. shareholders) of publicly traded companies see the value of the company go up (i.e. the price per share rises) and/or the company pays out some of those profits (a dividend).
It’s the same model, except that nowadays, the executive compensation isn’t in the form of paychecks as much as it’s in company stock. In theory, this makes the executives more motivated to cause the company to do well, as their personal compensation is directly tied to the performance of the company. Of course, this comes with caveats; often they’re unscrupulous and do tricky stuff to raise the value in the short term as they can exercise their options- in other words they do stuff to directly benefit the stock value so they can cash out, but that isn’t necessarily the best thing for the company in the long haul.
I’m not sure that manipulating stock is seen as unscrupulous these days.
Motivation can be provided by an ordinary paycheck.
Sure, but payroll is a fixed expense that a company is required to pay their employees, including the CEO. Stock options are something that isn’t a direct cash transaction; what costs there are to the company are along the lines of liqiuidty, opportunity costs, and other, more hard to quantify costs than payroll.
So a company granting a CEO $10 million in stock options doesn’t translate necessarily into a $10 million hit to the bottom line, unlike a $10 million salary.
And on top of it, the expectation is that CEOs will improve that stock price, so that maybe the costs involved will be offset by whatever raise in stock price the CEO conjured into being.
Firstly, let’s note that the 1,000x increase that the Huffington Post article puts into its title can’t be found anywhere in the body of its own text nor in the Bloomberg article that it cites. And, logically, that seems highly implausible. I’ve seen the recent philanthropic projects of Elon Musk and Bill Gates compared to Carnegie and Guggenheim, in relative scope. So it might be reasonable to say that we’ve gotten back to the wealth ratio of the 1920s, and that there’s been a lull between times, but for the title to be true, it would mean that the wealthy of the 50s would have to have been 1000x poorer than the wealthy of today. Would you say that Howard Hughes feels like he’s 1000x poorer than Steve Jobs was?
In the Bloomberg article, it does say this:
So, we’ve gone from 20-to-1 to 204-to-1 from 1950 to today, a 10x increase.
In the 1950s, the United States’ largest businesses were still only American businesses. Modern American businesses are global megaliths. In the 1950s, the culture was that a CEO was the king of the company and could bring his children in and hand it to them. They were treated like private corporations, and the leadership only changed from the second wrung down.
Now, a CEO is just another employee, but one who is tasked with managing one of these global megaliths, and the number of people who are trusted to have that sort of capability is quite small and could always be lured away by another company’s board of directors. They aren’t loyal to the company, any more than a Macy’s sales clerk is loyal to Macy’s, just their paycheck and if that paycheck isn’t competitive, they’re going to move on.
So, as with all things, the answer is market forces.
And the question is, how valuable is a CEO to the company? This is a person who is charged with ensuring that the company survives and grows. Survival means keeping all of its employees employed. Growth means bringing jobs to new people, who need those jobs. Failure means laying off, potentially, thousands of workers. If the choices made by this person is large enough to swing the employee count by thousands, saying that their salary should be worth 200x your average employee doesn’t seem all that insane. That’s how vital they are to the company.
The thing with the “market forces” argument is that the rise in CEO pay seems to be largely an American phenomenon. CEO to employee pay ratios in other countries has not climbed to the levels seen in the US. For example, looking at companies that have a true global reach, like the automotive industry, we have a huge discrepancy. General Motor’s CEO made $29 million in 2015, compared to Daimler’s (Mercedes Benz) CEO pay of $10.8 million in the same year, even though Daimler had a larger market cap at the end of (and throughout) 2015. Toyota, which was the largest car company in 2015 in terms of cars sold, had a CEO who had a total compensation of just over US $3 million. Granted, Toyota’s CEO (Akio Toyoda) is a descendant of the company’s founder and his salary can thus be seen as merely symbolic, but his compensation is in line with Japanese executive pay, which has historically been much lower than those of their American counterparts.
Sorry, I had meant to also mention culture since, as noted, things were different back when the position of CEO was inheritable.
Market + Culture, not just market.
And one presumes that it will change, or spread, or fluctuate. There’s no real knowing. The only important question is, would you rather live in modern day or the 50s? If modern day, then clearly this isn’t much of an issue.
I generally like your comments but this is just lazy thinking. Yes, I like the present. But that doesn’t mean I don’t have any complaints about some of the things that are happening at the present.
So top CEOs make the kind of money that top singers, professional athletes and movie stars get?
Not sure this is particularly worrisome.
Trueish, but fundamentally, what does it matter to you if some other guy is doing better than you or not, if you’re enjoying life? There are people who aren’t enjoying life. Of things to complain about, the latter seems more productive. And if the whole basis of the complaint is to compare to how things used to be, but things used to be worse, then that’s not great evidence that what you’re complaining about is an issue.