Is there a way to objectively prove the value of CEOs?

Lee took a shit load of stock at the same time, however.

I think the cycle is self-limiting (even though the limit is high). CEO compensation reaches a point where it starts becoming a significant portion of the company’s revenues, and then it has to stop, because it is unsustainable for the company. Of course, with some companies making billions per quarter, the CEO salary has to increase a lot before it starts impacting the company’s profitability in a non-negligible manner.

But still, it is all based on the illusion that if you pay more, you’ll get a better CEO, and I think this has been proven to be wrong, based on the performance of obscenely paid CEOs in the recent past.

Essentially, if you are choosing between two CEO candidates, one who is a $10 million/year caliber candidate and the other who is a $200,000 /year candidate, yes, I agree that you have a higher chance of doing well with the $10 million/year candidate.

But, if you are choosing between two CEO candidates, one who is a $10 million/year caliber candidate and the other who is a $2 million/year candidate, I don’t think there is any measurable difference in the expected performance of these two.

You may be paying $8 million more per year, just to increase your likelihood of success by 0.01%.

Even if the difference in likelihood of success was a bit higher, that doesn’t mean that that is the best use for that extra $8 million/year. You might get the same or better results if you get the $2 million/year CEO and use that extra $8 million/year by hiring more brilliant people for your company (more & better engineers, programmers, sales people, marketing, etc), or by buying some better tools or infrastructure.

Yeah and I know a lady who smoked two packs of cigarettes a day and lived to be 100 years old.

Good for her and good for Iacocca. What does this have to do with reality?

Which is what I said in the next sentence after you cut off my quote.

This analogy works only when companies are going head-to-head and the failure of a company is solely due to being out-smarted/out-classed by another company.

In the case of the financial meltdown, the CEOs were making seriously bad decisions, by allowing their companies to get deeply into very risky financial instruments. So, it wasn’t Mike Tyson *versus *Muhammad Ali, it was Mike Tyson *and *Muhammad Ali both deciding to take some new drug to make them stronger, but in the end the drug killed them.

The CEOs of all these companies took the “drug” of risky financial instruments to make more and more money, but they should have known better not to do this, not to take so much risk. These CEOs all failed. They failed not because some other, higher-paid, CEOs out-smarted them. They themselves were the highest paid in the land and they simply failed.

BTW, even in the case of head-to-head competition of companies, where is the proof that a $10 million per year CEO is so much better than a $2 million per year CEO? If there is no proof, how is that extra $8 million justified?

Where is the proof that *he *is knocking it out of the park? How do you know it is not due to his lieutenants? What specific actions has he taken to justify saying that *he *is knocking it out of the park?

When the information is there, it is obviously good to use it. My point wasn’t that CEO’s can’t influence performance, or that a company should not get the best CEO it can given budgetary constraints, but that there are serious informational problems within the system that means that it isn’t as simple as your PD box suggests. In particular when you model in to the problem the idea that much of the signalling is done by past salary itself - if you were paid highly, you were seen as successful, so you are more likely to be seen as deserving a high salary going forward. Of course that’s a simplification, and there will be many other information sources, but lets not pretend we are dealing with a world where people walk around with their 3d6 Manager attribute tattooed on their forehead.

And, just like in hiring coaches, there is often an inherent conservatism - lets take this guy who failed at a previous team, because he we can always claim he was good enough in other people’s eyes to have got that job once (or twice, or three times)… Taking a risk on an outsider has a much higher downside for the bureaucrats involved in the search process in many organizations.

Much more than an incestual relationship of the exec and the board of directors, it is a control of the upper echelons of the corporation for self aggrandizement that happens. They appoint the members of the compensation board and pay them well. That guarantees a growing bonus, deserved or not. They answer to a board of directors that in toothless and already on their side.
Then they jump from company to company and get rich leaving wasted companies behind. All you have to do is take over, fire a shitload of workers and show a great bottom line. keep it up for 3 or 4 years and jump ship. Rinse and repeat. Later , they find the corporate infrastructure is a mess and talented and trained workers are gone and that they do not have the cash to rebuild and compete. Sometimes they go on with a smaller company. Sometimes they go under. The exec is off building another multi million dollar mansion.

I don’t have any problem with professional athletes making millions, so I don’t think it’s sour grapes in the case of CEOs.

I think it’s because you can see the difference an athlete can make for his team, and it is highly unlikely that a player that is paid tens of millions will be useless for his team (or even bring about its demise)

In the case of CEOs, you just can’t say for sure what difference they make (and if that difference is due to them or due to their subordinates), and also it is quite likely that a CEO that is paid tens of millions will be useless for his company (or even bring about its demise)

Yes, these “entities” are creating this order and regularity. But is it due to the CEOs? I think that mega-corporations are run mostly on autopilot, and if the CEO were to go on vacation for many months, the company would function the same.

Other industrialized nations,who embrace capitalism like many of you do, pay their execs well,but no way near what we do. We are far ahead in exec pay. So it is not about capitalism ,but about gaming the system for their own benefit.

Sort of.

Not exactly what I was saying there though.

What you seem to be saying in your post is that while it might work out that paying top dollar gets you top talent it doesn’t generally work that way because people will game the system, etc etc. Again, not exactly what I was saying.

In professional sport sometimes you pay top dollar for a player and they just don’t pan out for various reasons. Maybe they just don’t work well with your system, or maybe there are personality conflicts…or maybe some other factor. And sometimes you can pick up some unknown guy pretty cheap who turns out to be a real star.

Thing is, that cheap guy is not going to STAY cheap for very long. Also, because it works out occasionally that the expensive guy didn’t work out or the cheap guy did doesn’t mean you should base your acquisition strategy on this aspect…not unless you like to lose a lot.

Sometimes CEO’s don’t work out. Maybe it’s a personality conflict, maybe it’s just that they are unsuited for the position, maybe it’s that they are inherently crooks or thieves or maybe it’s something else. However, these guy aren’t, in general, just a bunch of worthless schlubs who are picked solely because of who they know and what school they went too (as some have asserted in this and other similar threads).

-XT

Can’t we outsource CEO’s…say get in some of those low priced CEO’s from Japan or something?

Why outsource only the lower levels?

CEO’s just keep getting better and better the market demands they be compensated for it.

:rolleyes:

Lets see… You said…

I had said…

That’s close enough for me. I was accepting that better candidates probably want more money, so, ceteris paribus, to have the potential to get better talent you have to be willing to pay more.

Then let me explain what I am saying, because it isn’t what you think it is. The system, because of informational problems, is pretty much flawed. The biggest signal as to what a person is worth in the market is what they make. Given that what they make is determined by the same flawed system, the irregularities magnify and we spin further away from a merit based, market structure.

And they aren’t a bunch of worthless schlubs as a whole. But they also aren’t paid massive salaries because of their worth necessarily. The system is a flawed one, and while it may not be the “old boys’ club” as much as it used to, the right school and the right background are still very beneficial.

I think that should be part of the new salary cap provision. Except instead of outsourcing I think they should either ask some of the posters on the StraightDope to come in and save the day or farm it out to direct government oversight. THAT will certainly fix all of the problems…and imagine all the money it will save these companies!

I think the solution is within our grasp here…

-XT

There are no guarantees, he’s simply the single most influential person in a very successful company. If it’s his lieutenants doing the heavy lifting, who do you think gave them those jobs?

As a member of the board, you need to balance out the idea of ponying up a few million dollars for a guy who appears to be a successful leader in your industry, or saving that money while getting ready to announce to shareholders that their investment (which they’ve entrusted to you) is now worthless. Even if the guy you hire on the cheap does do fantastically well, you risk having him poached by a company that is willing to pay the big bucks.

My reading of it differed but I will accept your assertion…after all YOU know what you meant and I was a bit fuzzy there.

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.

They are paid, afaik, based on POTENTIAL profits or company expansion that they represent. Whether or not that potential comes to pass though…sometimes it does, sometimes it doesn’t. In many cases new CEO’s are hired based on their track record of profits or vision from their previous companies. I don’t think their previous salaries really come into the hiring equation except to give a ball park for what kind of compensation they would be looking for to bring their talent to the new company.

-XT

Actually, the results of This study show "a disturbing inverse relationship between the absolute dollars of CEO total direct compensation received and firm performance. "

And This Guy Claims that “Low CEO salary is tied to company success”

If anyone has links to any other studies that show that the more a company pays a CEO, the more successful it is, go for it!

Neither of those articles really says anything though. The second one seems to be talking more about startups and the other doesn’t really have much detail. Off the cuff what I’d say is that you (and possibly they) are confusing salary and compensation. In the second article the guy says he was going to take as his salary something lower than $180k/year…but what he didn’t say is what his total compensation would be. For instance, what was his over all stake in the company? What other perks were offered?

I agree that if it were MY company I’d tie a CEO’s over all compensation directly into the success of the company (though there are some pitfalls to this approach as well btw). The better the company does the more compensation in the form of stock options or direct salary, the worse the lower.

However, companies can structure themselves in whatever way seems best for them. At a guess, if there really WAS a serious study showing that the higher the compensation for companies (across the board) then boards of directors and share/stockholders would take note of this obvious fact and act accordingly. Those that didn’t would be at a competitive disadvantage after all.

The problem however is when the government steps in with bailouts. At that point you get real distortions. If a company has hired a bunch of worthless CEO’s and ridiculously over pays them then by the government stepping in to save the day all you are doing is encouraging this bad behavior…there will be no mechanism to change this behavior.

-XT

Here’s a link to a book review of
PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF EXECUTIVE COMPENSATION

From the Journal:
Manage. Decis. Econ.
26: 407–409 (2005)

It has a number of points that pertain to this discussion:

There is a lot to chew on here.