You may have misinterpreted the study. When it says
"There is a strong and positive relationship between sales and CEO compensation for firms in the U. S. commercial banking industry. "
I don’t think it means that highly paid CEO’s managed to increase sales. I think it means that companies with highly paid CEO’s also had high sales numbers. I believe that the interpretation of our poster L. G. Butts, Ph.D. is correct.
Yeah, you’re right. BTW, here’s a corrected link to the actual study. I couldn’t get my original link to work.Link.
Which part do you have issues with?
A recent development? Do you have evidence that the gap was higher prior to 1980? Is 1980 - 2010 not “recent” enough for you? or what? You are not clear.
Particularly a problem in the US? There seems to be ample factual evidence that the US pays CEO’s much more. Or do you dispute that this is a “problem”? Would you prefer the phraseology “this is particularly evident in the US” If this is what you mean, then I suggest you are being quite pedantic in saying “not a factually true statement”.
The thread was started in GQ. The OP explicitly stated:
As for charges of pedantry in GQ… Well, whoever heard of such a thing! The next thing you know, threads like this will be marched off to GD!
Ah, I joined in at the GD phase.
Do you know how the price of something is determined? Hint: It has something to do with “bear” and “market”, but it’s not a bear market. And it has little, if any, relation to the price of that “something” 50 years ago. Seriously, the first part of your post is like the complaint made by the crotchety old man who refuses to go to the movies because they cost so damn much more than they did when he was a kid. Or the person who scoffs at people paying $3.00 for a cup of coffee at Starbucks. After all, how much does water a handful of coffee beans cost?
Things change. The value of things change. We don’t determine the value of a thing by what it’s value was 50 years ago.
As for “syphoning”, that’s nothing more than an appeal to emotion.
Me, I’m much more interested in the original intent of the OP, which is to try and understand where the numbers actually come from and what they are actually caused by. I’ve done my share of googling for answers today, and haven’t come up with much. I wish we had some business savvy posters who could shed some light on the subject, because it’s really tiresome to keep hearing about how unfair the whole thing is.
I don’t know.
You came up with this statistic:
I take it from this that the MORE a CEO was compensated, the WORSE the percentage return was on his companies stock. So explain why the higher paid CEO’S are good for the stockholders?
Would you expect a lower paid CEO to generate better returns?
I suspect this is correlation without causation. Larger firms pay CEOs more, larger firms may not give quite the same level of stock returns, on average, being a bit less risky than their smaller counterparts.
Anyway, if CEOs are getting paid more today than they used to, there’s no reason to believe companies are better run on average than they used to be. You pay the guy 10x what he would have been paid 10 years ago he’s not going to suddenly work harder, or be smarter, he’s just going to work for you instead of your closest competitor. The main difference is that if you offer 1x what your CEO would have been paid 10 years ago, you’ll hire candidate #75 on your list of prospects, instead of candidate #1. When your company’s market value drops by 100x the CEOs salary you think, maybe I should have loosened the purse strings a bit.
I doubt that increase in CEO pay has much to do with objective value because it would be so hard to measure.
I suspect it would be a mixture of (a) companies being bigger and able to pay more as others have said, (b) mutual backscratching amongst the boardroom set, as other have said, © “cat food purchase strategy”, and (d) increased churn and the “heads or tails” game.
Cat Food Purchase Strategy
By cat food purchase strategy I refer to an experiment I once heard of (so it must be true, right?) where a cat food company raised its prices above its competitors without changing anything at all else about its marketing or product in any other way. Their sales went up not down. Presumably, above a certain base level, people can’t tell whether cat food is better or worse for their cat, or liked or disliked by their cat, so they just assume the more expensive one is better.
What will cause a company to do better or worse is a “dark art”. It results from a mixture of luck and skill, and the skill comes not just from the CEO but usually an enormous team. So it’s very hard to objectively judge CEO’s on performance, so people assume that the CEO’s who demand the highest pay are the best. Which creates an upward spiral as CEO’s keep demanding more.
The “Heads and Tails” Game.
I don’t know if you’ve ever played the game where a roomful of people stand up, and each chooses “heads” or “tails” by putting their hands on their head or their ass. Someone tosses a coin, and those that chose wrong sit down. Then those left standing choose again, and so it goes till there is one person standing left. This person has then chosen correctly on a coin toss often for more than six or seven tosses in a row. What a genius! Except of course they have exercised no skill. It’s just that out of a roomful of people, someone is bound to luck out.
Fifty years ago, people stayed with a company and worked their way up. Now people change more often, and professional managers buzz around between large corporations. There are tens of thousands of them at least to begin with. Some of them are bound to luck out in terms of always being associated with extraordinary success. So you end up with a handful who can be perceived to have The Golden Touch, who can write their own ticket.
It’s a negative correlation. That means that the lower paid CEO’s ARE generating better stock returns. And yes, I would expect this, if the CEO’s were contributing very little to the company performance, and merely taking money out for themselves that should have gone into shareholder value.
ETA: It seems that you’re also trying to say that smaller companies are riskier, and therefore generate higher returns on average. This is not correct.
Well, in a sense, a lower-paid CEO has a head start.
Assume two identical companies, except one pays their CEO $10 million, the other pays their CEO $20 million. If those companies then perform identically, the lower-paid CEO has generated better returns. At the end of the year, his company has $10 million more; the same $10 million that didn’t go into his pocket.
Man, anecdotes really rule the day in threads like these. “There have been cases,” eh? CEO comp is not even a rounding error typically in a Fortune 500 company, relative to their total expenses. John summarized the disconnect nicely, I think–if your real bitch is about worker pay, what makes anyone think a lower-paid CEO naturally means higher paid workers? It doesn’t.
These are the main, unsupported (so far as I have seen) memes that are now accepted as facts in certain circles: CEOs are most typically the result of crooked boards scratching the back of a buddy, decisions largely unrelated to any expectation of a CEO’s value added; CEO pay structure encourages them to actually make companies unprofitable, so that they can cash out; and worker productivity gains are being unfairly turned into cash for the CEO (and/or the shareholders). No one need support such assertions; they are accepted as fact. Does anyone have any actual, you know, evidence for such outrageous claims?
(By the way, among the many economic and financial terms misunderstood on this board “worker productivity” must be near the top of the list; it does not mean what people seem to think it means–automation, for example, increases worker productivity, an effect that has been HUGE in our economy over the last 50 years. It doesn’t mean people are working harder or something–average hours worked per worker have decreased over the last 10 years, for example. This board wants to define it as the sweat and smarts of the worker, an effect they earned, that they’re now being cheated out of. Productivity just means the hours required relative to the output. Period. If it takes a worker 2 hours now to produce 100 widgets, whereas his grandpa took 100 hours, that’s a productivity gain. It does NOT mean that grandson has produced a 98% productivity gain for the company and that grandpa was a slacker. I know it’s shocking, but companies pursue productivity gains to increase profits. It’s not some wild discovery to point out this connection–“they’re turning productivity gains into profit! Gasp!”)
[QUOTE=Robot Arm]
Assume two identical companies, except one pays their CEO $10 million, the other pays their CEO $20 million. If those companies then perform identically, the lower-paid CEO has generated better returns. At the end of the year, his company has $10 million more; the same $10 million that didn’t go into his pocket.
[/QUOTE]
Should be easy enough to do then. Simply provide some cites where there are two similar (you don’t have to go identical) companies, one where a CEO makes a certain amount in total compensation, and another where a CEO makes substantially less in total compensation, and show that the one where the CEO makes less in total compensation has a head start over the other. Then you win the thread!
Some key points. We aren’t talking about salary here, but total compensation. So, if one CEO makes a dollar in pay, but is compensated in stock options or some other means of compensation, you need to factor that in. Two, you need to also look at their relative stock performance. Perception of ‘hot shit’ CEO status can translate into higher stock prices for a company…which is another reason why companies compete heavily and are willing to pay top dollar for CEOs perceived to be ‘hot shit’. Three, comparing US CEO salaries with other countries is an apples to oranges comparison. There are a lot of factors that weigh in on total compensation and/or base salary, so unless you account for them all it’s fairly pointless to try and make such a comparison, unless you are trying to paint a deliberately misleading picture…which is why a lot of people naturally try and draw such comparisons, of course.
-XT
Could you explain why it’s apples to oranges, and not apples to a slightly different breed of apple?
And certainly you aren’t seriously suggesting that whatever tiny cultural and societal differences there are account for the levels of compensation?
Cultural? Sure, that has some factor, but I was thinking of the fact that they have entirely different tax structures in other countries, which means that you are going to get different compensation packages designed to tweak the compensation based on what is or isn’t being taxed, how it’s taxed, etc etc. If your salary is being taxed at a high level then it’s foolish to have a high salary, so you might be compensated in other ways that aren’t taxed as high…or aren’t taxed at all. That’s one of the reasons why stock options became so popular in the US in the last few decades. There are other factors as well, of course…so, yeah, I think that trying to compare US CEO salary to that in some other countries is apples to oranges, not apples to slightly different apples.
Someone brought up China earlier. They have a truly Byzantine system over there, where the ‘CEO’ might or might not be the guy actually in charge, or even if he is, might not be the one getting the most benefit. A lot of companies in China are almost fiefs to powerful military or political figures in China, so while the CEO might not make much, the General who’s virtual fief a given factor belongs to, so to speak, DOES get a large (personal) benefit from it.
-XT
And that truly is the heart of it. The self interest of boards is not to make decisions based on the long term health of the company but the short term material gain they can acquire by helping each other artificially inflate stock prices to cash out gains and reward each other simply for being in the club.
Cite? I can’t just let these pass any more.
Ok, where to start…
CEO Involvement in the Selection of New Board Members: An Empirical Analysis by Anil Shivdasani and David Yermack .
Page 1852 has the two paragraph conclusion, I can’t cut and paste it because I don’t have a PDF editor but to sum it up; half of the 341 Fortune 500 companies in the sample allow CEOs to be involved in the board selection process resulting in conflicts of interest for the financial compensation of both.
I doubt any two sufficiently identical companies could exist. I wasn’t claiming they do. Someone cited a study that there was a slight negative correlation between performance and CEO pay. I was just offering a thought experiment to explain the math; that a higher-paid CEO would have to generate revenue for the company equal to his salary difference (subject to things like stock option prices) to equal the net result of a lower-paid counterpart.
This is what you asserted:
I can’t even see your cite, but assuming it says what you translated it as, that does not support your assertion. It’s also a non sequitur. Allowing CEOs to be part of the selection process for board members by definition has an existing CEO in the equation. I suppose it could create an oversight conflict of interest, but not sure how that impacts the existing CEO’s comp.
And most importantly, that “cite” does not offer evidence for a single instance of unethical behavior, let alone rampant abuse. Where to start? Try again…as it stands, this continues to be an unsupported assertion that has garnered a great deal of affection on this board.