That would be because the link between shareholder value and CEO pay has vanished in many cases. CEOs presiding over companies whose share prices or market shares have tumbled don’t seem to get their compensation cut in return, in general.(There are exceptions.) Plus, is the extra $1 billion due to CEO action or to something else? If some genius creates a fantastic product, and makes the company $1 billion, why should the CEO benefit?
There are also issues with CEOs being rewarded for general market trends. There was even a Dilbert yesterday about it. Dogbert, as CEO, said he’d take $1 in pay and the rest in stock incentives. Since the market in general is almost sure to go up this year, as we recover, he’ll make a fortune no matter what. I’ve seen some suggestions that stock compensation requires do better than the market or industry average.
Thus the board members are “too busy” to do the duties required of them as a board member, but not “too busy” to accept compensation for serving on the board. Interesting.
No, not interesting. Outrageous. The board members who are supposed to be the watchdog of the CEO salaries are either (a) in the CEO’s pocket or (b) too busy to do their job. Neither answer should be satisfactory.
So, if the CEO at company A gets 100 X the average salary of his employees, and the CEO at company B gets 500X, the workers at Company B are overpaid? :rolleyes:
Of course a guy on the assembly line has exactly as much power to set his salary as the CEO with a Board he has appointed himself. Next you’ll be telling me that elections for directors are contested and hard fought as a rule.
CEOs do not appoint the BOD.
Salary is NOT total compensation.
Multiples are typically out-of-whack due to stock option exercises that include grants from up to 10 years prior.
You’re surprised? Look at the great job boards have done at the investment banks.
You should read the background on how Carly Fiorina was forced out at HP. There were a few directors there who actually cared, first the son of a founder, and also a venture capitalist who had the expertise and time to know what was going on.
Once they get in, they are part of a network that determines their own salaries and bonuses. That is not a system that will lower wages.
A kid at my health club works for a company that researches for financial company execs. They gather information on executive compensation. Then they develop a presentation of all the info. In order to hire the exec ,they have to find a way to get them to move. This company has to estimate the compensation that will lure the person to work for a new company. It of course ,results in upping the package in several ways. There are no downward pressures in the system.
Well, there is a convenient way. It’s called the internet.
But your post is still the most important factor IMO. The grand majority of shareholders really consider their stock as a temporary gamble token. Who cares what the company does ? If it goes down, I buy, if it goes up, I sell, and I trust the guys at the helm to do their best to make it go up (or trust the people who tell me so). That’s the “can’t be arsed” side.
And the other side, the “actually interested in what the company actually does, and in trying to steer it” either 1) have a sizeable portion of the shares, so they’re in the whole inbred thing 2) figures their 0,00001% of shares doesn’t give them any power 3) figures that while they realize they could do things with that 0,00001% of shares with other people holding 0,00001% of shares too, those other people either can’t be arsed, or don’t know how to communicate and unite either.
Since the board has absolutely no interest in setting up a solution or raising awareness to allow the silent majority to speak either, as that would jeopardize the little payola scheme they’ve got going, nothing gets done.
I’m all for changing that, but frankly, I can’t be arsed. Can’t somebody I vote for propose measures or something ?
I assure you, I have had enough stock options to be well aware of this - and I was simplifying extensively. If you’d like we could make it 100X and 500X the number of options.
As for CEOs not appointing their boards, absolutely true for a startup, but do you think Welch had a lot of board members on the GE board he didn’t want? I was kind of addressing this in my crack about elections.
My former CEO had a policy of never exercising options until he had to, when they were expiring, but he was a good guy. Does everyone do this? Option based compensation has other pitfalls, such as the incentive to run a price up for short term gain in order to cash out. But in terms of fairness, compensation is compensation. I made a bundle during the bubble on stock (and could have made more if I had been smarter) but a low level guy might well ask why I served 3 x more money in 2000 than I got in 1998. I wouldn’t have a real good answer for him.
I saw that same Dilbert. And I don’t disagree with it. When Carly Fiorina was running HP she had a guaranteed bonus minimum of $1.3 million. Personally, I don’t see how you can call guaranteed money a bonus, but these are the games played at the top.
If CEOs are being paid primarily in stock and the stock tumbles, how is it not that the CEOs have had their compensation cut? Certainly they aren’t going to have to make any significant liftestyle changes because they made “only” $3 million this year instead of $10 million, but they certainly aren’t making as much as if the stock performed well.
In terms of the genius making billions for a company, I tend to think that it was through the support of the company that allowed such a thing. Also, I tend to think companies do reward the genius for coming up with such things. Anecdotetly, I worked at IBM’s TJ Watson Research Center in NY and was having lunch with my boss in the cafeteria one day. He pointed over to another table and said, “That’s John Cocke. IBM cuts him checks regularly for the stuff he’s done.”
But that’s the rub. What about when these CEOs run their companies into the ground?
Stock options.
All upside, no real downside.
But fine you say, they are still not making as much money. If the share price falls below the issuance date the option is “out-of-the-money” and the executive will not exercise the options.
Think that will stop them? Nope.
Enter the fun of re-pricing and backdating.
Not sure if back dating was or is legal but you can see CEOs have a way of sidestepping these problems.
Neat trick huh?
Who says they are overpaid?
They should be fired and a new CEO found. I personally don’t think that doesn’t seem to happen nearly enough. But I think in most of the cases where we are talking about grossly overpaid CEOs, they haven’t run the company into the ground. Quite the opposite. They’ve condensed and streamlined the company and made huge profits. Usually that is at the expense of many worker jobs or sending them offshore, but in the end the company is more profitable. In exchange, the CEO accepted stock options and are reaping the rewards of that. Once again, if a company can make more money without you than with you, why should they continue to keep you around?
Having said that, I think there is a bigger tradeoff to be made here. A company can make a short term profit through layoffs and moving things offshore, but in the long term that may not be the best choice. For one, it may mean they aren’t ready to move quickly to take on more market share since they’ve probably eroded much of the support. Secondly, companies that value bottom line over retaining high quality people are likely to fade out in the long run. So while it may make sense today to lay off a bunch of people, it might not be good in the long run. A strong CEO needs to make those kinds of decisions.
If they make the wrong decisions, they need to go. But if those decisions reap billions for the company, why shouldn’t the CEO make some of that?
I’m sure there are hundreds of these kinds of tricks going on in boardrooms all across the country. But complaining about these things is akin to complaining that the Yankees pay too much for a 3rd baseman as you fork over $40 for upper deck seats. You can make a choice in all of this. If you don’t like the way a company is being run, sell the stock and buy stock in a company you think does things the right way. If enough people sell the stock the price drops and the CEO gets booted. Richer, but booted. Life is unfair that way. If you do a lousy job at whatever you do the consequence isn’t that you have to pay back what you made, but rather that the company just won’t be paying you any more.
This economist’s video gives another explanation: the salaries are not to reward the guy at the top, but rather to encourage his underlings who are hoping to take over his position.
My answer - stock options - has already been given. Often repriced until the Feds caught them at it. It was legal to do - but it had tax implications they were ignoring.
My Ph.D. is in computer architecture, so Cocke is worth every penny. But not everyone is a Cocke. How much did Fred Brooks get? But my point was that very often the CEO (and the high level managers) make a bundle for work lots of people in the company have done. They often benefit more when things are good, and certainly benefit more when times are bad. IBM is better than most, or at least it used to be, so you may have a rosy view of things. I know plenty of IBMers - both still working and RIFed, and they don’t complain all that much.
Please list all the CEOs booted because their stock price dropped. Carly got booted because she pissed off the board. Nearly every week Gretchen Morgenstern (last name probably spelled wrong) in the Times gives the stories of CEOs doing very well while killing stockholder value. You’ve heard the excuses - only someone like me with experience can get the company out of the hole it is in … that I dug.
Can’t watch the video at work, but I bet the average engineer, second level manager, and secretary are very encouraged. I do expect that the top few managers have the compensation go up along with the CEOs, so the rising tide lifts their boats real well.
When things were good the outrage wasn’t all that loud. And there are two types of layoffs. One is for efficiency, and for that I can see the CEO being rewarded. The other is in response to dropping sales because of mismanagement or bad product decisions or bad investment decisions, or deciding to be overleveraged like the Tribune companies. I don’t a CEO deserves much of a bonus for that type of layoff.
There’s a few things worth addressing here.
Firstly, it is incorrect to simply assume that CEOs as a group have little impact on the success or failure of their company. It is certainly the case that with a large, successful corporation, operating in good times, virtually any relatively polished individual could move in as CEO and essentially let the company run itself on “auto pilot.”
Where you see the real quality of a good CEO is when they drastically change or improve a company’s performance or corporate culture. Virtually every prominent CEO that you hear about historically is someone that either built a company from nothing, through insane work ethic and competitive drive, or someone that rescued a company from the brink of disaster through innovative ideas.
The work of the CEO is never the work of a single man, and one thing that does often get overlooked is that most successful CEOs have the ability to effectively judge talent in others. A good CEO is only as good as his senior executives, and good CEOs tend to shake up those ranks when they take over (except for the rare case when competent people are already in those positions.) A good CEO also understands how actions flow in a company, and they understand that even though they may never directly interact with the man at the bottom, the correct marching orders sent down from the top can change how that person does their job and thus how the whole company performs.
An example I like to bring up is Gordon Bethune.
In 1994 Continental Airlines had net losses every year since 1985. Since 1983 nine different CEOs had tried to turn things around, Continental had filed for bankruptcy protection in 1983 and 1990 (and it didn’t fully emerge from the 1990 filing until 1993.) Wages and salaries had been cut, employee turnover was extremely high as was the use of sick days. Continental employees would remove their Continental insignias from their uniforms when they were off duty because they did not want to be associated with the company. Continental ranked dead last among the 10 man airlines in on-time arrivals, it had the highest number of mishandled baggage reports per 1000 and by far the highest number of complaints per 100,000 passengers. Complaints filed with the DoT were 30% higher than the 9th worst airline and three times the industry average.
Essentially Continental was a shit company, it had shit profitability, its product was shit, its customers were not pleased with it, and its employees hated working there and were poorly paid and poorly motivated.
Gordon Bethune was initially appointed President and COO, and he looked at a company with horrible employee morale and he believed that directly lead to many of the problems Continental faced. Because Continental was essentially a sinking ship employees were more prone to blame one another and to try and sabotage other employees rather than work together to solve problems constructively. The cuts in wages and salaries obviously made employee attitudes even worse, and that translate to the customers almost every time, and it leads to people not really caring how well they do their jobs, so baggage gets lost and flights are delayed.
Bethune had a lot of plans for the company, but most of them were not aimed at cost-cutting, but improving the company’s culture. While Bethune was President and COO he still reported to a CEO who refused to implement any of Bethune’s plans unless they directly lead to reduced costs. Bethune went to the board, and they ended up offering the CEO a six-month leave of absence and gave Bethune control of the company from the President/COO position. Instead of taking the offer the CEO resigned and Bethune moved into the position, with a weak mandate from the board and essentially a timer on his position as CEO.
I won’t go into all the details of Bethune’s “Go Forward” plan (which can probably be googled), but he focused on targeting activities Continental did poorly and scaling them back or eliminating them, cutting costs where costs needed to be cut, and by drastically improving the relationship between management and its employees. One of his first actions as CEO was to prop open the doors to the executive suite so that it was open at all times (previously it had been locked and monitored with security.) He brought in a sharp guy from Bain & Company who helped him look at areas Continental did not perform well in and they either worked to improve this, or in some cases they cut back. For example at the time Continental Lite, a service designed to exactly emulate Southwest Airlines, was responsible for 70% of Continental’s losses. What worked for Southwest was not working for Continental because Continental lacked several of the key competencies that made Southwest’s no frills point-to-point way of doing things successful. Bethune also made the important decision of judging any changes he made based on how a random passenger in “aisle 5” would react to those changes. In his mind, any increase in cost (that would lead to an increase in ticket price) could not be justified unless the man in “aisle 5” was willing to pay for it.
In 1993 Continental lost 39 million, in 1995 they made 225 million and this number went up virtually every year under Bethune. By March of 1995 Continental was ranked first in on-time performance among all major airlines. No small part of this was the fact that Continental had started to pay a monthly bonus to all flight personnel, that would be paid out every month Continental’s on-time performance was satisfactory.
Bethune made Continental a company where people wanted to come to work, and a company where individuals felt valued for their work for the company. This is a major change from a company where people had previously been ashamed to even wear the Continental insignia and this change only happened because of the man at the top. The previous CEO had cared exclusively for cost cutting (and Bethune certainly did some cost cutting, but he brought in a professional who knew more about efficient operations than he did to manage those cuts) and didn’t really care at all about employee attitude or performance. In a business like the airline industry customer satisfaction drives ticket sales. People don’t like to fly on airlines that lose their baggage or make them significantly late.
Gordon Bethune is an example of the sort of impact a CEO can have, and the changes he implemented had corporation-wide impacts and could only have been done by the top guy. Even though some of them were simple common sense things, only the guy at the top had the authority or the power to see them implemented company wide, and the failure of Continental’s nine previous CEOs shows that this wasn’t exactly a company that people were flying on “auto pilot.”
Now, what is interesting is Bethune was definitely not the best compensated CEO in the country at this time. He wasn’t even the best compensated CEO in the airline industry. There are many other examples of very good CEOs who are not well compensated. Many of the CEO/Founder types (like Bill Gates, Steve Jobs, Jim Sinegal et cetera) are wealthy men. However they did not pay themselves lavishly as CEO, their wealth was built because they essentially started these companies and held a large ownership sake in said company.
Other companies that have performed very well over the years, like Wal-Mart (much maligned as it is, their financial performance and competitive success is nothing short of amazing) do not pay their CEOs nearly as much as the CEOs of other companies. Michael Duke, CEO of Wal-Mart stores makes something like $1m salary and $12m total compensation (the rest being stock awards and such.)
Considering he is the CEO of what is almost always one of the top 1-3 companies in the entire world by virtually every metric used, I think that isn’t an unfair compensation, and it is compensation that represents a very small portion of Wal-Mart’s operating income.
He’s not even in the top 100 in 2008 executive compensation. Who is at the top?
Well, #1 is Larry Ellison of Oracle, at $192 million. I don’t really have any issue with Ellison’s income because it is almost entirely off of stock gains, he is the founder of the company and has had this ownership stake from the very beginning. He made his money because he built a successful company, the person who owns such a company is obviously entitled to its profits–very few people would disagree with this.
If you look at the list of top compensated executives, you will see most of them are the company founders, this means they typically are major shareholders. If you look at the Forbes list of executive compensation in 2008, almost all of the guys who are really, really high on this list are company founders. Angelo Mozilo, Howard Schultz, Aubrey McClendon et cetera. I wonder if at least part of the reason American CEOs make so much more than those in Europe and Asia is because Americans are more entrepreneurial by nature.
A lot of the highly paid executives on this list who aren’t company founders are not surprisingly CEOs of companies like Goldman Sachs, Lehman Brothers et cetera–those companies operate in an industry that essentially pays its people exorbitantly too much money and I think in huge part that is out of pure ego. These companies like to brag about whose people make the most money, and it becomes a vicious, and harmful, cycle. (A lot of these guys from the 2008 list who ran such companies are no longer employed or their companies are defunct.) I don’t think that guys like Lloyd Blankfein were so grossly over paid because of some weird American cultural thing that excessively values CEOs over other employees–I think it is simply because he was in an industry where compensation across the board (even down to the lower level traders and such) was an ego thing. It was all about getting ahead of the Joneses for these people. I think that is something that is actually absent from a lot of American companies and most companies in other countries, but is unfortunately not absent from the financial sector in the United States.