# Help me understand CEO pay **URL:** \ **Category:** Great Debates\ **Created:** [December 7, 2011, 6:56pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397 "2011-12-07T18:56:08Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Keeve](https://avatars.discourse-cdn.com/v4/letter/k/f07891/32.png) [@Keeve](https://boards.straightdope.com/u/Keeve)\ **Post date:** [December 8, 2011, 2:57pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/21 "2011-12-08T14:57:20Z")
> [@Cheesesteak](#): > > With a CEO it’s even more important to get the “right” guy. Ultimately, what is the difference between Google and Webcrawler, or Dell and (insert any one of a dozen failed PC manufacturers here) or eBay and (insert any one of a dozen failed auction sites here) or Best Buy and Circuit City or Barnes & Noble and Borders? > > The difference is the decisions made that guide the company, one guy (or group of execs) decides to go one direction and the company is the biggest thing since Standard Oil. A different guy in a similar company goes a different direction and the company falls apart, to be bought out for 10 cents on the dollar. Yes, but that that guy the CEO or is it the various managers? I’ve always wondered what sort of decisions it is that the CEO makes which might fit the description that you’ve made. From what I’ve seen – both in the news and at the various places I’ve worked – is the the Top Guy spends most of his time on things like getting new customers, keeping the old ones happy, and securing funding. Questions like, “Should we develop these products or those products?” are generally decided by the high- and middle-level managers. Does the CEO of a car company decide which type of cars the should produce? Does the CEO of a university decide which are the best educational methods? Does the CEO of a hospital decide which are the most effective procedures? I believe the answer is none of the above. Rather, all of them seem to spend their time at cocktail receptions, being friendly with either the local Chamber of Commerce, or with the Secretary of Commerce, to make things nice for funding and such. Hmmm… Rereading my own post, I think I may have answered my own question. As a consumer, I’ve always looked down on that shmoozing, but maybe it is more important to the company’s health than I’ve realized. On the other hand, there’s still a big problem with the gigantic severance packages that some of these guys get. I can’t think of any explanation for that other than the cooperative backscratching mentioned by other posters. ---
**Author:** ![Cheesesteak](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cheesesteak/32/3694_2.png) [@Cheesesteak](https://boards.straightdope.com/u/Cheesesteak)\ **Post date:** [December 8, 2011, 3:25pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/22 "2011-12-08T15:25:00Z")
> [@Keeve](#): > > Does the CEO of a car company decide which type of cars the should produce? Of course he does. You think someone is going to tie up a $100 million production line with a new product and not get the CEO’s signoff? If he’s simply going to rubber stamp whatever his Exec. VPs hand him, he has no value. If he has ANY value, it’s going to be reviewing the business landscape with his VPs, discussing the various options, and then telling the VP “Let’s introduce a car in 2015 based on the following set of characteristics we have just discussed”. Leave the details to the subordinates, the high level strategy is his. Even if he delegates certain decisions to his direct reports, they report their business plans to the CEO on a regular basis, it’s his job to make sure their plans are consistent with his vision for the company. CEOs also make the BIG decisions. Do we buy out company X, do we merge with company Y, do we build a factory in Taiwan? ---
**Author:** ![BlinkingDuck](https://avatars.discourse-cdn.com/v4/letter/b/eada6e/32.png) [@BlinkingDuck](https://boards.straightdope.com/u/BlinkingDuck)\ **Post date:** [December 8, 2011, 3:25pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/23 "2011-12-08T15:25:42Z")
> [@Space\_Vegetable](#): > > I read this explanation many years ago, not sure where: > > Each year, most boards set CEO compensation by looking at a survey of similar companies. They decide whether their CEO is roughly as good, better, or worse than the average CEO, and correspondingly, set next year’s compensation equal to, a bit more, or a bit less than the average for those other companies’ CEOs. > > It’s human nature to think the guy you hired is better than average. (The article had figures showing that “better than average” was a far more common evaluation than “worse than average”, but I can’t recall them.) So year after year, the typical board sets their CEO’s compensation to be a little higher than the average compensation for comparable companies. This feedback loop makes the average compensation increase over time. > > Note that appropriate compensation would continue to increase in a recession, since most boards will think their CEO handled the challenges better than the average CEO (if not, they’d have replaced him already), and so deserves more than the average compensation. This makes sense…and it might be a good share of what is happening. I just wish they would do it to all positions. I left several previous companies because they would not pay me what I thought I was worth. The conversation would look something like this. They - “we decided to give you a 1.3% raise.” Me - That’s really a pay cut since inflation was 3.4%. They - well…we looked at the industry and the average pay increase over last year was 1.5%…so 1.3% is close Me - Why not 1.5% then? They - 1.3% is close. Me - Do you think I am better than the average person you had at this position? You’ve had many other people in this position over the history of this company. You yourself said I increase efficiency of this position over 10 times previous. So, why not triple or even double my salary? They - are you frickin nuts?! We pay you near industry average now! Me - Actually, according to this research (hands them some paper) I am making only 60% of industry average. Certainly I deserve _average_ at least. even if you dispute these numbers, certainly I should be worth that!? They - lets talk about this…later. === The above is not exactly how it went 🙂 but the gist is the same. It doesn’t seem to work on ‘grunt’ positions…so they should be able to not do it for CEO’s as well I would think. ---
**Author:** ![anson2995](https://avatars.discourse-cdn.com/v4/letter/a/c77e96/32.png) [@anson2995](https://boards.straightdope.com/u/anson2995)\ **Post date:** [December 8, 2011, 3:53pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/24 "2011-12-08T15:53:48Z")
There is no evidence that there’s any correlation between CEO performance and pay, and in fact there are [countless examples](http://www.businessweek.com/investor/content/sep2009/pi20090923_783858.htm) of CEOs who have been paid extravagant sums despite notably poor performance. Case in point: [Craig Dubow of Gannett](http://www.nytimes.com/2011/10/24/business/media/why-not-occupy-newsrooms.html?pagewanted=all), who retired because of health issues earlier this year. The company’s stock price fell from $75 to $10 during his six-year tenure, he laid off roughly 40% of the workforce, and needless to say the company wasn’t very profitable. Still, he got [millions of dollars in bonuses each year, had his salary doubled](http://www.poynter.org/latest-news/mediawire/125128/gannett-paid-ceo-dubow-9-4-million-in-2010-double-his-2009-pay/), and left with a $37 million retirement package. This case is far from unusual. Ballplayers get big bucks, but if they stink they don’t get bonuses and contract extensions. They get their walking papers. ---
**Author:** ![Crawlspace](https://avatars.discourse-cdn.com/v4/letter/c/d6d6ee/32.png) [@Crawlspace](https://boards.straightdope.com/u/Crawlspace)\ **Post date:** [December 8, 2011, 4:18pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/25 "2011-12-08T16:18:29Z")
> [@John\_Mace](#): > > This is GQ. Opinions cannot be proved or disproved, and I’m not going to waste my time attempting to do so. Funny, I thought the entire purpose of this board, this forum in particular, was to fight ignorance with facts. While you may not be able to convince others their opinion is wrong, there is plenty of meat in these posts that can be proven or disproven. Of course, I suspect that you have no such facts and are blindly defending the free markets from what appears to be a staggering inefficiency. ---
**Author:** ![Swords\_to\_Plowshares](https://avatars.discourse-cdn.com/v4/letter/s/b38774/32.png) [@Swords\_to\_Plowshares](https://boards.straightdope.com/u/Swords_to_Plowshares)\ **Post date:** [December 8, 2011, 4:24pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/26 "2011-12-08T16:24:07Z")
> [@John\_Mace](#): > > That last part is not a factually true statement. The cite I gave said that the CEO pay gap was “by far the largest in the world” so it’s not my opinion. If it’s not true I welcome you to find a counter-cite. ---
**Author:** ![Keeve](https://avatars.discourse-cdn.com/v4/letter/k/f07891/32.png) [@Keeve](https://boards.straightdope.com/u/Keeve)\ **Post date:** [December 8, 2011, 4:33pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/27 "2011-12-08T16:33:37Z")
> [@BlinkingDuck](#): > > The above is not exactly how it went 🙂 but the gist is the same. It doesn’t seem to work on ‘grunt’ positions…so they should be able to not do it for CEO’s as well I would think. I think your logic is flawed. There is a very specific reason why it doesn’t work for grunt positions: The ones who decide salaries aren’t grunts. They are CEOs. (The CEO might not decide the salary of each individual, but they do oversee the whole budget, and then whoever chooses the specific salary is restricted to working within that limit.) However, the CEO’s salary is decided by people who are not really constrained by such minutiae. Refer back to the “backscratching” mentioned in previous posts. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [December 8, 2011, 4:55pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/28 "2011-12-08T16:55:08Z")
Here is a [study](http://its.law.nyu.edu/faculty/coursepages/data/First_Assignment.pdf) (PDF) by Kevin J Murphy of UCLA. It concludes that CEO capture of a small percentage of the value that they create. The most commonly theorized reason is that while most workers are paid their marginal productive value CEOs can not be because there is only one CEO. The reason for the change in CEO compensation over time has alot to do with the tax code. It used to be that tax rates were much higher on the top portion of taxpayers, so executives took much of their compensation in perks which were treated as business expenses and not salary. When tax rates fell on the top brackets starting with JFK’s tax cut and continuing with Reagan’s it became more efficient to offer higher salaries instead of lavish perks. Then during the mid 1980’s there was a reaction against the high salaries and congress passed a law that capped the amount of executive pay that could be deducted as a business expense. This lead to the practice of paying executives in stock options. Since the stock market did really well CEO compensation also did really well. Also globalization allows companies to grow much bigger so even as compensation grows for CEOs it is still manageable because the companies are so much larger as well. This pushes up the price of CEO talent for everybody whether the company is globalized or not. ---
**Author:** ![Dahnlor](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dahnlor/32/533_2.png) [@Dahnlor](https://boards.straightdope.com/u/Dahnlor)\ **Post date:** [December 8, 2011, 6:02pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/29 "2011-12-08T18:02:13Z")
> [@John\_Mace](#): > > That last part is not a factually true statement. This is not a factually true statement. I believe at settles the matter. ---
**Author:** ![Quartz](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/quartz/32/267_2.png) [@Quartz](https://boards.straightdope.com/u/Quartz)\ **Post date:** [December 8, 2011, 6:26pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/30 "2011-12-08T18:26:28Z")
> [@dracoi](#): > > Stock options (which are worthless unless the company’s share price goes up) are an excellent motivator if you want to maximize short-term shareholder value… but they’re not necessarily such a good motivator for long-term company health. Does that not depend upon when the person can vest the options? Options vesting after 1 year should have a very different effect from options vesting after 5, right? ---
**Author:** ![Colibri](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/colibri/32/1841_2.png) [@Colibri](https://boards.straightdope.com/u/Colibri)\ **Post date:** [December 8, 2011, 6:32pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/31 "2011-12-08T18:32:05Z")
It’s probably time to move this over to Great Debates. Colibri General Questions Moderator ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [December 8, 2011, 6:42pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/32 "2011-12-08T18:42:29Z")
> [@anson2995](#): > > There is no evidence that there’s any correlation between CEO performance and pay… Depending on how one measures “performance” that can actually be true, or at least it was found to be true in this limited study: > [@](#): > > This study has contributed to the literature in the area of executive compensation by examining the relationship between CEO compensation and performance, size and specific CEO characteristics. This study used only data from the U. S. commercial banking industry. > > \ > There is a weak and negative relationship between percentage stock market return and CEO compensation for firms in the U. S. commercial banking industry. > > \ > > There is a weak but positive relationship between return on equity and CEO compensation for firms in the U. S. commercial banking industry. > > \ > > There is a strong and positive relationship between sales and CEO compensation for firms in the U. S. commercial banking industry. > > \ > > There is a strong and positive relationship between assets and CEO compensation for firms in the U. S. commercial banking industry. > > \ > > There is a strong and positive relationship between number of employees and CEO compensation for firms in the U. S. commercial banking industry. There were other conclusions, but I picked those because I thought they were the most interesting to look at. While increasing sales is certainly a positive thing, it doesn’t do much good for the investors if the first two things aren’t achieved (stock performance and return on equity). It doesn’t get into the “why”, but it does provide a well-researched study of CEO pay vs performance. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [December 8, 2011, 6:43pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/33 "2011-12-08T18:43:17Z")
Dan Ariely in **Predictably Irrational** noted that the explosive growth in CEO salaries came after there were new rules requiring that they be published. The intention was that this should shame the CEOs into accepting lower salaries - it actually caused an arms race. Athlete salaries may be high, but there are pay caps and consider what they would be if other athletes were involved in setting salaries, as opposed to owners. Clearly if I were a CEO on a compensation committee, I would be all for raising salaries because I could then go back to my board and tell them I was underpaid. It is true that options are a big part of compensation, and a big part of the problem. Consider this. If the market is rising as a whole, you will make a fortune on your options, even if your company under-performs in its segment. Second, having options encourages you to take actions to raise the price of your stock short term. Then you can cash out, and not care if it crashes soon after. That is why there are proposals for holding bonuses and the like to see if the actions help in the long term, and for taking them back if they don’t. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [December 8, 2011, 6:46pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/34 "2011-12-08T18:46:31Z")
> [@John\_Mace](#): > > You have some interesting opinions, but they are not facts. Have some facts: From [here.](http://www.reuters.com/article/2011/08/04/us-executivepay-idUSTRE7732PD20110804) > [@](#): > > Not surprisingly, the gap between the top and bottom on pay is biggest in the United States, where average CEO remuneration is 142 times that of employees, according to Thomson Reuters ASSET4 data. British CEOs pull in 69 times more than their workforces while egalitarian Sweden has an average differential of only 34 times. > > After the hiatus of the recession, the gap between the boardroom and the shop floor is yawning wider. (I didn’t mean to put that last in, but it will do for anyone quoting 2009 numbers to show that there isn’t a problem anymore.) And [here.](http://www.compensationcafe.com/2011/06/does-global-culture-impact-executive-compensation.html) > [@](#): > > There is hand-wringing in American over growing income inequality and excessive CEO compensation. The gap between the “haves” and “have nots” has gradually widened for decades. U.S. CEO’s now make 269 times more than average workers; that gap is 20 times bigger than it was in 1965. A study by the consulting firm Towers Perrin of top CEO pay in 26 countries found that U.S. CEO’s make an average of twice as much as their British, French and German counterparts and four times as much as the Japanese and Koreans. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [December 8, 2011, 6:54pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/35 "2011-12-08T18:54:17Z")
> [@Voyager](#): > > Have some facts: > > From [here.](http://www.reuters.com/article/2011/08/04/us-executivepay-idUSTRE7732PD20110804) > (I didn’t mean to put that last in, but it will do for anyone quoting 2009 numbers to show that there isn’t a problem anymore.) > > And [here.](http://www.compensationcafe.com/2011/06/does-global-culture-impact-executive-compensation.html) As I’ve said in other threads on this subject, why is the ratio from 50 years ago objectively better than the ratio we have today? And if we were to cut CEO pay to be more in line with what it was 50 years ago, how would that improve the average worker’s pay? And that is actually the real problem, right? The CEOs are going to be wealthy under either scenario. ---
**Author:** ![MichaelEmouse](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/michaelemouse/32/101_2.png) [@MichaelEmouse](https://boards.straightdope.com/u/MichaelEmouse)\ **Post date:** [December 8, 2011, 7:10pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/36 "2011-12-08T19:10:48Z")
I often get the impression that the people who complain about the fact that “in 1970 CEOs made X times as much as workers but now they make 10X times as much” would, if we were in 1970, be complaining that “CEOs made X times as much as workers”. It’s quite possible that CEOs of big firms are, on average, overpaid. This is most be linked to a principal/agent problem, both in terms of information about problems/opportunities and incentives to better/worsen them. If a company were wholly owned by one person who dedicated himself fully to the company, there would be no significant problem of CEO overpay. But then, in such a situation, the shareholder would likely be the CEO. ---
**Author:** ![Happy\_Fun\_Ball](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/happy_fun_ball/32/17664_2.png) [@Happy\_Fun\_Ball](https://boards.straightdope.com/u/Happy_Fun_Ball)\ **Post date:** [December 8, 2011, 7:48pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/37 "2011-12-08T19:48:20Z")
> [@John\_Mace](#): > > Depending on how one measures “performance” that can actually be true, or at least it was found to be true in this limited study: > > There were other conclusions, but I picked those because I thought they were the most interesting to look at. While increasing sales is certainly a positive thing, it doesn’t do much good for the investors if the first two things aren’t achieved (stock performance and return on equity). It doesn’t get into the “why”, but it does provide a well-researched study of CEO pay vs performance. Meh, the last three points (those with strong correlations) can be summed up as a strong positive correlation between CEO pay and the size of the corporation. Doesn’t really tell you much. ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [December 8, 2011, 10:01pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/38 "2011-12-08T22:01:47Z")
> [@John\_Mace](#): > > As I’ve said in other threads on this subject, why is the ratio from 50 years ago objectively better than the ratio we have today? There isn’t a very good objective way to measure this, but one could look at economic stability and mobility as a few metrics. > [@](#): > > And if we were to cut CEO pay to be more in line with what it was 50 years ago, how would that improve the average worker’s pay? In theory a company that isn’t paying their CEO so much would either invest in growing the business or pay a dividend. I would argue that both are likely better for the economy as a whole than increased executive compensation. > [@](#): > > And that is actually the real problem, right? The CEOs are going to be wealthy under either scenario. Absolutely. CEOs will always be wealthy, but it doesn’t take much imagination to realize that there is a disparity at which the socio-political situation is no longer tenable. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [December 8, 2011, 11:05pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/39 "2011-12-08T23:05:26Z")
> [@John\_Mace](#): > > As I’ve said in other threads on this subject, why is the ratio from 50 years ago objectively better than the ratio we have today? And if we were to cut CEO pay to be more in line with what it was 50 years ago, how would that improve the average worker’s pay? And that is actually the real problem, right? The CEOs are going to be wealthy under either scenario. Are companies today 20 x as profitable as 50 years ago? Do they provide 20 x the stockholder value? If I walk into my bosses office and tell him I should get a raise of 1,000% because there is no objective reason why I shouldn’t he’d laugh his ass off. Maybe the workers would get a little more and maybe not, but decreases in CEO salaries would go right to the bottom line. Even with options, perhaps some of it could be distributed more widely. There have been cases where CEO compensation is close to net profits (or even more) so there could be significant changes in eps in some cases. Most importantly, if CEOs focused on long term profitability rather than cashing out quickly, they might do better. They’d still have to fight investor short term interest, but at least they’d be on the side of the business. No one is really concerned with CEO wealth. It is more the unequal growth of that wealth compared to the workforce as a whole, and the siphoning off of productivity gains into their own pockets. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [December 8, 2011, 11:08pm UTC](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397/40 "2011-12-08T23:08:14Z")
> [@MichaelEmouse](#): > > I often get the impression that the people who complain about the fact that “in 1970 CEOs made X times as much as workers but now they make 10X times as much” would, if we were in 1970, be complaining that “CEOs made X times as much as workers”. Please try to find a cite. I was in college in 1970, there was all sorts of unrest, and this isn’t a complaint I ever remember hearing. I’m sure someone somewhere said it, but it was not a major concern. [Previous page](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397.md?page=1) [Next page](https://boards.straightdope.com/t/help-me-understand-ceo-pay/605397.md?page=3)