The theory is that the boards of directors will do what’s best for the company, which presumably means paying exactly the right amount for what a person is worth. (Ha)
Actually, it’s the reverse. Since they themselves are execs at other firms, they will pay outlandish amounts hoping to raise the average pay and then cash in when their name comes up.
This current trend has been a growing bubble for some decades. Where big shots once settled for a fraction of what they get today. And like all financial bubbles…
So, will this trend keep going until the bubble bursts or will something put the brakes on? Regulations? Like a stop to options. Tax policy? Corporate tax policy, personal tax policy, tax disincentives to options and bonuses?
Or something more substantial, like a revision of who sets the pay. Have all compensation voted on by shareholders? Or, since shareholders these days are often caretaker weasels in giant funds, perhaps let the true stakeholders approve. The other people in the company.
There are no internal mechanisms to lower exec pay. Even losing billions of dollars will get a pay raise and bonus. It does not serve the stockholders or the corporation itself. It is just what happens when people are able to set their own salaries.
The cure. Link exec pay to the bottom line. The company loses money, the exec does too.
It may require the government getting involved.
You have to know stockholder votes are jokes. Most sign proxie statements and never vote. The ones that would vote are huge stockholders who could take time to vote. A normal person with a few shares actually has access to no info on the internal workings of the corporation. They would not be qualified.
They are legally qualified to vote their shares, and have access to all public information about the company, same as any other investor. This is just more ‘have not’ whining about those who have.
The problem is that most shares are not owned by individuals with a personal stake, but by institutional investors. The people at the Vanguard 500 Index Fund who own 1.0% of General Electric, over one million shares stock, don’t have an interest in whether the company earns money or not.
Hell, these guys all went to the same prep schools and colleges and sit on the boards of directors of each other’s companies and vote each other’s pay raises. It’s like they’re playing poker against someone with a marked deck but they promise not to read them.
Beats me how to fix it. Do you send everyone who owns a share of the Vanguard 500 a proxy for each of the 500 companies in its portfolio? That’s pretty unwieldy.
Jumping off the thread with a conspiracy theory doesn’t speak well of the theory.
There is no magical “right” value for how much a CEO is worth. And more importantly, whatever the CEO is making is such a drop in the bucket compared to total earnings that lowering it is meaningless.
I just started a similar thread a few weeks ago, about why anyone should care about the size of the income gap, and really the only answer that came out of it was, “Because at a certain rate, poor people hate rich people too much.” But if there’s no actual economic advantage/disadvantage in any way, then that hatred is just irrational.
Hopefully this isn’t beating a dead horse, but why should there be a cap on executive compensation? If a business chooses to pay its CEO a gazillion dollars, what is it to me? So what if the guy (or gal) isn’t worth it?
I imagine that the reason is some sort of idea that as business become more profitable, it is only ‘fair’ that employees reap a proportional amount of benefit from that profit, yes? If so, I think that there’s a sense of justness I have that agrees with that perspective, but it’s superseded by the idea that as an employer I should have the right to pay people what I want, and see if I get anyone who wants to work for me at that price (which might or might not be connected to the overall profitability of the company).
If we were really serious about addressing the disparity of wealth in this country I think a smarter way to do it would be to put limits on interstate commerce, but while we’re all eager to cap the income on those undeserving rich people, we’re a lot less willing to put the reins on our own ability to consume conveniently and in mass quantity, which is enabled by those wealthy corporations.
There’s already a mechanism for participating in company profits: the employees can buy stock. That’s how it works. What would be unfair is if there was a law prohibiting employees from buying stock. Or prohibiting employees from leaving their jobs to start their own business. But there are no such laws so whining about the paycheck is nonproductive.
Employees want all the upside of owning stock (such as increased profit sharing) with no downside risk (such as stocks losing their value). If it sounds childish, it should, because it is. You can’t have it both ways.
And those same employees, when they sell their house, do not share the profits (capital gains) with their hairdresser, babysitter, and lawn care guys. And if you were to ask the homeowners why they don’t “share” their profits with those folks, they could rattle of the logical answer without skipping a beat: “I paid those folks to do a service for me and they don’t own the house!”
Somehow, that thinking (the concept of “ownership”) which they already have in their brain to some degree just doesn’t seem to register when they complain about their relationship with the company.
Well, I guess it’s easier to whine about the paycheck than it is to evaluate the company’s stock to see if it’s worth buying.
Here is some information on how peer groups for setting compensation are selected. The peers are sometimes chosen to help boost pay.
Here is a suggestion from the former head of DuPont. He says that compensation committees should not be allowed to talk to anyone inside the company, since what the CEO wants to get gets back to the compensation consultant, who probably wants to be recommended.
The cure is to only buy stuff from companies that give you good value for your dollar. If their costs are reasonable (and their quality is good), they will offer the best value. On the other hand, if they are compensating the execs foolishly (along with all their other expenses), they will not be able to keep their prices in line. They will soon learn the error of their ways, or go out of business.
As for how much money somebody takes home that *doesn’t *come from your pocket, why the hell should you care?
I know I’ve read of cases where CEO compensation is a significant portion of earnings - I remember like 80%. If the CEO had taken a major paycut, earnings per share would have risen dramatically. I haven’t found the cite yet, it is from a Morgenson column. It might be that jerk at Singer, but I’m not sure.
Because a business is supposed to be run for the benefit of its owners, not for the benefit of the CEO. In this case the owners are being ripped off.
This would be great if compensation was tied to profitability, but we don’t see a lot of cases where businesses losing money results in the CEO getting zapped. There is also the nice touch of the CEO getting a raise after firing workers, or cutting their benefits. All legal, but it still stinks. If the economy is so bad that this is necessary, the CEO should feel the effect also. If the CEO screwed up so that layoffs are required, the CEO should suffer. If the company is out-competing other reasonably similar companies, then I’m all for CEOs making more.
Eh, arguing anything by non-representative examples is silly. Your average CEO probably makes something around $150k a year, plus maybe a bit more in company stock (which he can only sell in small, pre-set increments at a pre-determined schedule).
So would you say part of the problem is caused by the fact that people’s investment funds are managed in the way they are? As Bill Door said, if I’ve got a 401k and I have some tiny percentage of a percentage of ownership of, say, GE, I don’t really get to vote on anything. If all stockholders had a proportional vote on the board, would it then be ok for CEOs to make whatever the board decided?
I care because the bastard is making obscene amounts of money while I and millions of others are living paycheck to paycheck. But I still don’t think government should have a role in this, if companies want to pay obscene amounts of money to their CEOs that’s their stupid business practices.
Your suggestion to only buy from companies that don’t compensate their execs foolishly is technically correct but practically impossible. Most products aren’t from a single source, your Big Mac might have cheese from one company, meat from another, ketchup from another, etc. And most stores have products from a large variety of sources.
The truth is these companies have enough profit margin that they can afford to compensate their execs foolishly.