# Is there a way to objectively prove the value of CEOs? **URL:** \ **Category:** Great Debates\ **Created:** [February 6, 2009, 6:54am UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678 "2009-02-06T06:54:27Z")\ **Posts on this page:** 9\ **Page:** 4
**Author:** ![villa](https://avatars.discourse-cdn.com/v4/letter/v/bc79bd/32.png) [@villa](https://boards.straightdope.com/u/villa)\ **Post date:** [February 6, 2009, 8:28pm UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678/61 "2009-02-06T20:28:09Z")
> [@xtisme](#): > > Let me ask you something at this point…by and large do you feel that CEO’s are hired to run companies based solely on what their previous or current salaries are? That companies hiring potential CEO’s don’t have information about their past performance? > > I’m not being snarky here (I’m hoping it doesn’t come out that way), I’m genuinely curious. By and large I don’t feel that the information on past performance exists, and where it does, to a large extent it is the result of data provided by the prior corporation itself. I think there is a massive informational gap out there, which, combined with the short termism engendered by the Anglo-American model of business financing, leads to perverse incentives that are bad for long term economic prospects. I also, to answer your later stuff, don’t believe that profit maximization is a realistic model for modern businesses. ---
**Author:** ![Algher](https://avatars.discourse-cdn.com/v4/letter/a/3d9bf3/32.png) [@Algher](https://boards.straightdope.com/u/Algher)\ **Post date:** [February 6, 2009, 8:40pm UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678/62 "2009-02-06T20:40:29Z")
> [@villa](#): > > By and large I don’t feel that the information on past performance exists, and where it does, to a large extent it is the result of data provided by the prior corporation itself. > > I think there is a massive informational gap out there, which, combined with the short termism engendered by the Anglo-American model of business financing, leads to perverse incentives that are bad for long term economic prospects. > > I also, to answer your later stuff, don’t believe that profit maximization is a realistic model for modern businesses. Top 5 complete executive pay, and performance - is available from publicly available SEC documents. Unless a CEO is hired out of the lower ranks (i.e. NOT one of the top 5 officers of a company), you can see how much he was paid, and you can look at the firm’s performance. ---
**Author:** ![villa](https://avatars.discourse-cdn.com/v4/letter/v/bc79bd/32.png) [@villa](https://boards.straightdope.com/u/villa)\ **Post date:** [February 6, 2009, 8:52pm UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678/63 "2009-02-06T20:52:09Z")
> [@Algher](#): > > Top 5 complete executive pay, and performance - is available from publicly available SEC documents. > > Unless a CEO is hired out of the lower ranks (i.e. NOT one of the top 5 officers of a company), you can see how much he was paid, and you can look at the firm’s performance. Yes, pay is available. The problem is that “performance” isn’t - what is listed in the filings isn’t an adequate metric for CEO performance. ---
**Author:** ![Algher](https://avatars.discourse-cdn.com/v4/letter/a/3d9bf3/32.png) [@Algher](https://boards.straightdope.com/u/Algher)\ **Post date:** [February 6, 2009, 8:55pm UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678/64 "2009-02-06T20:55:38Z")
> [@villa](#): > > Yes, pay is available. The problem is that “performance” isn’t - what is listed in the filings isn’t an adequate metric for CEO performance. What are you not seeing in the Income Statement, Balance Sheet, Cash Flow from Operations and Footnotes that you need to see? Did the company’s value increase under the CEO, vs. their peers? This is a chart in every proxy - nice pretty picture to make it simple (I used to charge $5000 to make that chart every year for a client). ---
**Author:** ![Euphonious\_Polemic](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/euphonious_polemic/32/3002_2.png) [@Euphonious\_Polemic](https://boards.straightdope.com/u/Euphonious_Polemic)\ **Post date:** [February 6, 2009, 9:07pm UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678/65 "2009-02-06T21:07:02Z")
Here is yet another study that seems to correlate poor company performance with excessive CEO pay: [Audit Integrety study](http://seekingalpha.com/article/109914-poor-performance-often-linked-to-excessive-executive-pay) > [@](#): > > Audit Integrity finds a close correlation between excessive executive compensation, overall poor corporate governance and inferior market returns across a wide range of industries. If anyone can point to a study that links high CEO pay to GOOD performance, let’s see! I have not been able to find one. ---
**Author:** ![villa](https://avatars.discourse-cdn.com/v4/letter/v/bc79bd/32.png) [@villa](https://boards.straightdope.com/u/villa)\ **Post date:** [February 6, 2009, 10:51pm UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678/66 "2009-02-06T22:51:02Z")
> [@Algher](#): > > What are you not seeing in the Income Statement, Balance Sheet, Cash Flow from Operations and Footnotes that you need to see? > > Did the company’s value increase under the CEO, vs. their peers? This is a chart in every proxy - nice pretty picture to make it simple (I used to charge $5000 to make that chart every year for a client). And if judging corporate performance (which is all that can possibly tell you, not CEO performance) from SEC filings were that easy, investment would be a lot less of a difficult game to play. Back when I was in that game, studies showed that 50% of an investment’s performance came from the market, 45% from the sector, and 5% from the individual stock itself. Using this same information, that judges the corporate performance in a retrospective snapshot. And encouraging CEO’s to manage to short term reporting requirements is not necessarily a long term success strategy. ---
**Author:** ![Algher](https://avatars.discourse-cdn.com/v4/letter/a/3d9bf3/32.png) [@Algher](https://boards.straightdope.com/u/Algher)\ **Post date:** [February 6, 2009, 10:53pm UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678/67 "2009-02-06T22:53:20Z")
> [@villa](#): > > And if judging corporate performance (which is all that can possibly tell you, not CEO performance) from SEC filings were that easy, investment would be a lot less of a difficult game to play. > > Back when I was in that game, studies showed that 50% of an investment’s performance came from the market, 45% from the sector, and 5% from the individual stock itself. Using this same information, that judges the corporate performance in a retrospective snapshot. And encouraging CEO’s to manage to short term reporting requirements is not necessarily a long term success strategy. So you look at the company’s performance against its sector. Pretty easy to do, with these nice spreadsheets you can download to analyze. ---
**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:** [February 7, 2009, 12:16am UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678/68 "2009-02-07T00:16:58Z")
> [@Cheesesteak](#): > > Because a low-paid CEO is almost guaranteed to ruin the company. > > It’s like that 4 box chart they show in economics classes. Between you and your competitors there are 4 possibilities > > 1 - Your CEO is highly paid, Their CEOs are highly paid - level playing field > 2 - Your CEO is low paid, Their CEOs are low paid - level playing field > 3 - Your CEO is low paid, Their CEOs are highly paid - they will get the best and most talented CEOs > 4 - Your CEO is highly paid, Their CEOs are low paid - you will get the best and most talented CEO > > Your company will wind up with no strategic advantage by paying less for a CEO, outside of saving a tiny percentage of your profit on his salary. Maybe you do wind up with a brilliant guy who is a true game changer, and he’ll ditch your company as soon as possible to cash in at one of your competitors, leaving your scrambling for another cheap CEO. Say you start in box 2. You have a competent, but not brilliant, CEO. But the compensation committee, named by him, may think he is a bit smarter than he really is. In any case, by your argument, they want to move to box 4, to keep him. Now you have a theoretical advantage. Your competitor, who is now in Box 3, clearly needs to move to Box 1. Perhaps their CEO isn’t as smart as yours, but who is going to tell him that? Your CEO, being smart enough to see he screwed up and a problem is on its way, decides to jump ship. The interviewing company, seeing his high salary, figures he must be a great guy, and hires him. Your company now needs a CEO. You look at the CEO of your competitor, see he is highly paid, and knows the business too, and hires him away. You pay hims some more to come, which destabilizes the situation, and we continue to spiral up. In your scheme, being in box 3 is never justified, even if your CEO is screwing up. ---
**Author:** ![Algher](https://avatars.discourse-cdn.com/v4/letter/a/3d9bf3/32.png) [@Algher](https://boards.straightdope.com/u/Algher)\ **Post date:** [February 7, 2009, 4:20am UTC](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678/69 "2009-02-07T04:20:45Z")
> [@Voyager](#): > > Say you start in box 2. You have a competent, but not brilliant, CEO. But the compensation committee, named by him, may think he is a bit smarter than he really is. In any case, by your argument, they want to move to box 4, to keep him. Now you have a theoretical advantage. Your competitor, who is now in Box 3, clearly needs to move to Box 1. Perhaps their CEO isn’t as smart as yours, but who is going to tell him that? Your CEO, being smart enough to see he screwed up and a problem is on its way, decides to jump ship. The interviewing company, seeing his high salary, figures he must be a great guy, and hires him. Your company now needs a CEO. You look at the CEO of your competitor, see he is highly paid, and knows the business too, and hires him away. You pay hims some more to come, which destabilizes the situation, and we continue to spiral up. > > In your scheme, being in box 3 is never justified, even if your CEO is screwing up. THE CEO DOES NOT NAME THE COMPENSATION COMMITTEE!!! I don’t mind the populist uprising going on here, but you guys REALLY should do a little bit of reading first. CEO compensation at a public company is set by the compensation committee of the Board of Directors. The membership of that committee is disclosed in the Proxy. For example, Apple Computer (I posted this in another thread already, but the “kill the rich” idiocy around here is tough to fight): > [@](#): > > The Compensation Committee is responsible primarily for reviewing the compensation arrangements for the Company’s executive officers, including the CEO, and for administering the Company’s equity compensation plans. The Compensation Committee’s authority may not be delegated to the Company’s management or others. The Compensation Committee met a total of four times during fiscal 2008. The members of Apple’s Comp Committee: > [@](#): > > William V. Campbell has been Chairman of Intuit Inc. since August 1998. Mr. Campbell also is Chair of the Board of Trustees of Columbia University and a director of the National Football Foundation College Hall of Fame. > Millard S. Drexler has been Chairman and Chief Executive Officer of J. Crew Group, Inc. since January 2003. Previously, Mr. Drexler was Chief Executive Officer of Gap Inc. (“Gap”) from 1995 and President from 1987 until September 2002. Mr. Drexler also was a director of Gap from November 1983 until October 2002. > Albert A. Gore, Jr. has served as Chairman of Current TV since 2002, Chairman of Generation Investment Management since 2004 and a partner of Kleiner Perkins Caufield & Byers since 2007. Mr. Gore also is Chairman of the Alliance for Climate Protection. Finally, since someone here will always bring up that everyone takes care of each other: > [@](#): > > Compensation Committee Interlocks and Insider Participation > The Compensation Committee members whose names appear in the section entitled “Board Committees” were Compensation Committee members during all of fiscal 2008. Mr. Campbell formerly served as an officer of the Company and of FileMaker, Inc., a subsidiary of the Company. No other member of the Compensation Committee is or has been an executive officer of the Company, and no member of the Compensation Committee had any relationships requiring disclosure by the Company under the SEC’s rules requiring disclosure of certain relationships and related-party transactions. None of the Company’s executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, the executive officers of which served as a director of the Company or member of the Compensation Committee during fiscal 2008. So the CEO does NOT set his own pay, nor does he set his own bonus or stock awards. He can negotiate for higher pay, he can hire a compensation consultant to argue on his behalf, he can purchase enough shares to swing the vote - but he does not set his own pay. [Previous page](https://boards.straightdope.com/t/is-there-a-way-to-objectively-prove-the-value-of-ceos/484678.md?page=3)