How 'bout we cap CEO salaries?

Great Debates
21

The problem with this particular solution is that most companies will have the same minimum wage, roughly, so they will have the same CEO wage, regardless of the size of the company. A bad executive at GE can cost tens of thousands of jobs, and billions of dollars of investor money. Who would want that responsibility when they could get the same compensation running a company 1/100th the size?

The other aspect of CEO compensation is that people who become CEOs are generally people who are already spectacularly successful at their current job. People who want to control CEO compensation want the CEO to take on all the risk, if the company fails to perform, he doesn’t get paid. Who would take on that risk when they have a solid job that they are kicking the crap out of already? Hmmm… I can keep my $2m/yr job that I know I can handle and keep making $2m/yr indefinitely, or I can take a risk on this new company where I might make $5m or I might make $200k and go bankrupt instead.

22

Because that’s the only thing that will tell us what the quantitative relationship actually is between CEO salaries and company performance. Or whether CEO salaries are actually freely determined by market forces. And this is the sort of thing we need to know in assessing whether your assertions are actually valid.

23

Yes, indeed it is. Just as waste disposal practices used to be up to the individual companies, and minimum wage levels used to be up to the individual companies, and worker safety policies used to be up to the individual companies, and the length of the workday used to be up to the individual companies.

These are all things that became subject to regulation because we decided that typical company practices were unfair, counterproductive, and bad for us.

Now we’re examining the question of whether the typical company practice of unprecedentedly huge disparities between CEO and worker pay might be unfair, counterproductive, and bad for us. In order to answer that question, we need quantitative facts about what the effects of the practice actually are and how they work.

Don’t try to scare us away from the issue by merely repeating “it’s none of our business, it’s none of our business, it’s none of our business.” What we’re considering here is whether we should make it our business, just as we made corporate pollution and the eight-hour workday our business years ago.

Okay, what have I said that you would like a cite for?

That may very well be. However, that means that you’re not the right guy to be taking up space in a debate thread vehemently asserting things you can’t back up.

24

Ok, fair enough. Lets start then with Microsoft…is that fair?

Bill Gates annual salary is: $901,667 (he appearently got a pay raise in 2003). He also has 1.1 billion shares of Microsoft (about 10% of the shares outstanding), which translates into $175.6 million in annual dividends. Thats a LOT of money, right?

Microsoft however made (profit) $31.9 billion for fiscal year 2003, and was up 11% from its FY 2002 profits.

My back of the envelope calculation puts that as less than a percentage point of the total profits. Is that reasonable? I’m unsure how to directly translate this into the actual impact the CEO has in making that profit except by example, perhaps comparing Microsofts performance with another software or OS vendors performance.

Do you wish further examples of CEO salaries vs the profits of their companies? I’m not sure how meaningful such things are in relation to the question as its the companies themselves who need to weigh the compensation and salary options they pay their CEO’s vs the performance they get in return.

-XT

25

Hey, slow down, this thread is moving too fast.

One doesn’t have to be ten times better, one has to be $45 million better. If a mediocre CEO will bring a company $700 million profit and a good CEO will bring a company $1 billion profit, then the good CEO is worth $300 million more.

But aren’t the CEOs part of the board of directors? There is basically a small group of people determining their own salaries. People will put their own self-interests above that of the company. Ultimately, the board answers to the stockholders, but how much do the stockholders really know?

To be fair to xtisme, you haven’t come up with any evidence either, just assertions and questions. This is a debate about theory after all, and logic can sometimes be just as good as evidence for debating purposes.

26

Well that’s the big question, isn’t it? What is the ultimate goal of your proposal? Is it to make the ordinary worker bees in corporate America better off? Will that money actually go to the regular workers?

Is there actually anything wrong with CEOs making those salaries or do you just it offensive that certain individuals make huge amount of money?

Do you honestly believe that CEOs and other executives won’t find some way to compensate themselves in other ways? Salaries are but a small part of the value of the CEOs entire package when you include options, stocks and other perks.

27

Are you saying that because something was regulated in the past that means that it is automatically a good thing…so therefore we should add more regulations based solely on that? After all, several of your points above, especially the regulation of a set minimum wage, is open to debate as to how wise a policy that was. To use a counter example, at one time slavery was thought to be a good thing…so, should we have continued with that because, well, we always did it that way before, right?

I’m not saying that all regulation is bad…only that basing your arguement that we should regulate CEO salaries on the fact that we have regulated other things in business is a flawed arguement. Perhaps you may want to expand your own position here and tell me why such a regulation would be a good thing and benificial to business…not just tell me that because companies in the past were forced to regulate some aspects of their business that this translates into regulation of CEO salaries being a good thing.

Why? You seems to be going in a round about fashion to say that a companies business is some kind of social responsibility or something like that. Its NOT our business unless we are shareholders in the company. Its the companies business to make money…if they feel they need to pay a CEO X amount of money then thats their decision. Society has nothing to say about it…unless one assumes that companies are in business to satisfy societies needs about being ‘fair’. As you seem to be in fact saying that without saying it I’ll just state my disagreement with that philosophy…if you didn’t already know that.

Actually, before asking you for cites (I’m not a big cite hound), why don’t you instead lay out your own position instead of merely picking mine apart. That would be a good place to start…why do you think it would be in (I suppose) societies best interest to regulate CEO salaries and add another layer of government imposed regulation on companies. What would the benifit be both to the company and society? Feel free to lay out whatever other arguements you would like to make. If, after reading through your own position I need a cite (I doubt it), then I’ll ask at that time.

Well, generally I go into lurker mode when someone who knows more about a subject than I do wades in and starts tossing out the cites that seem to drive this board. I like this board because I generally come out learning more about the subjects that interest me than I go in with…and that there is a tendency for me to modify even the positions I’m most ‘vehement’ about when someone presents me with logic or facts that run counter to my own initial perceptions.

That hasn’t happened yet. Also, if you want me to simply shut up your best plan is to simply stop responding to me…I obviously won’t continue to insert my thoughts into a thread if everyone is ignoring me. Since I haven’t seen anyone else wade in yet (including you) with anything more substantial than what I’ve put in so far I will just carry on if its all the same to you…or even if its not. : :wink:

-XT

28

Try this link . I’ve looked a t a whole bunch of references, mostly academic. I did find that there was correlation between compensation and stock price (but the studies were done during the bubble) but not between compensation and profitability. After the bubble the increase in CEO compensation slowed slightly, but nothing compared to the collapse in stockholder value. If you can find something showing a hard link, please post it. Otherwise I think this is a libertarian fantasy.

Microsoft is a terrible example. First of all, no one argues that it has been successful. Try Enron or Tyco if you want contradictory anecdotes. Second, Gates’ salary is well within the limits proposed by the OP. The dividends (and his worth as measured by appreciation in stock price) is not really a good measure of the normal case, since Gates was a founder of the company and therefore naturally has lots of stock. In the more usual case the CEO gets given stock.

29

Yes, thats true and a good point. Thats how abuses in the past (and even today) happen. However, ultimately its in every board members best interest to have a profitable company…greed is a powerful motivator after all. Even if I’m willing to look the other way because Jack the CEO is my golfing buddy, if Jack consistently does a poor job and the company consistently loses money, then eventually my own self motivation is going to force me to vote against Jack and get him fired. Once enough people on the board of directors feels the same way (once THEIR profits and perks are threatened) then Jack is gone and we will have to find someone else. If we are stupid enough to appoint another loser to Jacks position and give him a similar princely salary without producing results then we are that much closer to having the company go tits up. THAT isn’t in our best interest.

Does it happen? Sure. Look at all the companies big and small that have gone belly up in the past.

-XT

30

That’s actually a good question. I’ve got one for you. Most non-union performance appraisal plans call for salary increases based on performance. Do you think this is bad? Should someone doing a crappy job get a big raise (especially if he is a pal of the boss?) If not, why do CEOs get that kind of deal?

What harm does it do? Well, if the board is too chicken to toss the CEO out (and remember they get picked by the CEO) maybe the CEO who is screwing up will leave if he’s not getting a raise. Why even try to improve or change direction if the company is losing money, the stock price plummets, but you still get a hefty increase and a nice bonus?

31

The problem comes because the board of directors is an oligarchy. If board member Joe points to CEO Jack and says, “I think you’re overpaid.”, Jack can point the finger right back and say, “And i think you’re overpaid!” It’s in the best interest of Joe to keep his mouth shut so that he can be overpaid, too. Of course, it has its limits; the board must weigh their own self interests with the performance of the company to be sure they keep their jobs.

32

I’m crying tears of laughter. Why don’t you give a cite showing how much company stock the typical outside director has - stock not given to them by the company. I remember seeing stockholder proposals to require that directors own a certain minimum amount of stock, all opposed by management and roundly defeated. Being sued by stockholders. as is beginning to happen, may stop some of the very worst offenses, but it is not exactly common. Giving a hefty but not blatantly ridiculous rais is damn safe.

The CEO’s job is in danger if he or she pisses off a major stockholder (like Eisner did) or the board in general (like Carly Fiorina.) Anyhow, fire guy X and hire guy Y for even more money, while guy X will get a raise in his new job.

33

My lunch break is nearly done and I have a meeting coming up so I don’t have time to go through your link in detail atm…probably get to it tonight. As to your point, I wouldn’t expect the salaries and compensation of CEO’s to drop across the board due to a down turn in the economy. If they were good producers in the past there is every expectation that, once the economy picks up again, they will be good producers in the future. No real reason to immediately drop their salaries. To use my sports analogy again, if the Bulls lose some games or don’t make it to the championship there is no immediate reason to drop Jordans salary unless he is directly responsible. Even if he IS responsible and playing badly, there might not be a reason to immediately drop his salary as there is the potential that he will do better in the future…he was a good producer in the past after all and may become again. In the medium term it may be best to lower his salary or even drop him…but only after consideration.

I don’t have a cite that shows a hard link, no…that doesn’t necessarily make it ‘libertarian fantasy’ though. I do admit to being somewhat of a libertarian of course…but that doesn’t mean I’m automatically wrong. :slight_smile:

Certainly there are counter examples (like Enron as you pointed out). There would have to be, as there are good companies that make consistant profits over time, and bad companies that implode. And there are good companies who eventually implode, and poor companies who turn things around and become profitable again. My own thoughts are that the CEO and corporate management have a big impact on this. But how to quantify that across the board?

As for my example being ‘bad’ I’m not sure I follow you. I selected a well known company that was easy to access both the CEO’s salary, stock options and company profitability. The fact that Gates is a founder is not relevant I don’t think…he’s still the CEO. If you think it would be ‘better’ for some reason to pick a different company and list the CEO’s salary/benifits vs company profitability I can certainly find other examples. However, they will all vary so, as I said before, I don’t know how meaningful it would be. Again, my take is that its up to the companies to decide whats best for them and whats best to maximize their profits. I have serious doubts that CEO salaries are paid based on whim with no expectation by the board of directors that a given CEO is best to maximize those profits, but feel free to provide Kimstu’s cite if you have one. Of course, it would need to be across the board, or at least a high percentage of companies who do so to be meaningful…I conceed freely that there are individual examples of companies doing all manner of stupid things. Generally such companies are the ones who eventually flounder and sink though.

-XT

34

Well that’s actually two different things. One is overall CEO compensation, the other is tieing compensation to performance. I certainly don’t think that CEOs should be able to make huge windfalls with golden parachutes while their companies go under. On the other hand, I don’t have a problem with CEOs taking part in the success of their company.

35

I do not support the OP, even as a thought experiment. I do not find it workable.

However, there is no market force control over CxOs. The game is rigged. Failing companies routinely increase the actual money being handed to the top brass. Even Forbes and Fortune magazine have run articles describing and decrying the problem with runaway pay inflation for corporate officers.

I do not have a clear answer that would not be worse than the problem, but the problem is real. (If I were to propose solution, it would be along the lines of corporate investors, primarily insurance companies and large trust funds–taking an active role in watching how their money is spent in hiring and beginning to push for board reforms through stockholder movements. Currently, too many of those investors have established semi-independent departments where the personnel watch nothing more than the bottom lines, buying and selling stock without regard to the full nature of investment. Until that changes, or until the current situation falls in shambles, I see no changes in the future.)

36

We would need a whole bunch of data on the alleged correlation of company performance with CEO salary, though, not just one data point. The links posted earlier by Voyager suggest that there’s a tendency for CEO pay to stay high even when their companies aren’t performing well.

But at least I’m willing to back up any of my assertions if anybody asks me to. Believe me, I would much rather be spending my time here debating factual issues with you and Voyager and Cheesesteak and others, instead of trying to rein in xtisme’s flood of unsupported assertions with constant cries of “Cite?”

Of course not, as you would know if you had actually read my post where I said we should not jump to the conclusion that CEO pay necessarily must be regulated. But I think it’s perfectly valid to consider the issue of whether or not regulation could be a good thing in this case.

Well, that’s good advice. Bye.

37

If the system worked the way I proposed, the ordinary worker bees would benefit- since, to get a raise, the CEO needs to give 'em raises. The ultimate goal, however, would be to increase productivity for the entire company- since, if the company’s successful, theoretically everyone would benefit, not just the higher-ups.

Mostly I just don’t understand it. In the story I cited, worker’s wages were being cut, while upper management’s wages were being increased, which seems totally bass-ackwards to me. Now, to be fair, management’s wages were being improved to give them incentives to not jump ship- but how many lower-level employees are going to hang on with their wages cut in half?

I, um, actually mentioned that as part of my original post. It’s already happening, and my posit doesn’t address that at all. However, I will point out that if this sort of thing were to be mandated by law, the law would have to plug those loopholes, making unreported bonuses illegal.

For the record, I’ve thought of another problem with this plan. It seems to me that it would be more efficient for companies to keep their staffing as lean as possible, and to pay those remaining employees more… but this could lead to an unemployment problem. However, it could be that with people having more money, we’d be seeing more start-ups.

Also, there’s nothing to prevent Company A from having the widget (which they need to build their doohickey) produced by Company B, since Company B can produce the widgets for cheaper than Company A can. However, Company B is only another company in name only, and is kept as a separate company in order to keep costs down. I’m not sure if there’s a solution for this, or if it would even be a problem.

38

I never denied this. I’m well aware of examples of companies who do incredibly stupid or selfishly stupid things (golden parachutes and the like for sinking ships, to mix metaphors). I actually worked for such a company. But I think that the market DID take care of them…they failed. Oh, they were able to milk every drop out of it before it did fail, but in the end the companies failed and the gravy train was done.

I agree with you that there is a problem. No matter what system is put in place there will always be wiggle room for abuse…and there is certainly abuse in our current system. Even state run systems are heavily abused. I also don’t have an answer, though I know that government imposed salary caps or further regulation aren’t the correct answer. I suppose it comes down to ‘how well does the system work despite the abuse’. Myself, I think the system we have, while not optimal, has done a pretty good job and I say would prefer not to mess with it unless something is seriously broken. And if we mess with it I would prefer the government with its hand of stone is selected as a last resort for a seriously screwed up situation.

-XT

39

Well, okay, that’s fair… but why do you find it unworkable even as a thought experiment? Is it simply because there’s no way in hell any government official could get this thing passed, or is there some sort of technical or ethical problem?

I’m just asking because you then go on to say that you do see a problem with the existing situation.

40

Right, because you know you’ve brought SO much to the discussion so far. I notice you still haven’t bothered actually laying out your position or answering any of my questions.

It certainly is…bubye chief.

-XT