One factor hasn’t been mentioned yet: When a CEO candidate negotiates his prospective salary, he gets to negotiate with the Board of Directors – which is composed of people like himself, from the same social class, with a similar upbringing, similar business-school educations, and some of the directors might be the applicant’s old frat brothers, golfing buddies, or even distant relatives. All these directors share the candidate’s view of how much a CEO should be paid, at least to the point of bringing their first offer into the same ballpark as his initial demand.
I’ll second this. We’ve got this situation where I work.(The boss is admittedly only a VP) Just listening to the other guys our division is in deep deep trouble. In a nut shell they all want to bail at this point since he uses his position to push the guys around. In my case I’ve already planned my exit so I can go back to school full time.(I’m planning on shooting for med school so that shows I’m not the laziest guy around.) Anyway the deal is that he’s insulted the other guys and intimated they’re all incompetent boobs. Unfortunately he’s gotten his wish so to speak since morale is largely destroyed. Unfortunately he’s tied fairly closely to our division so if it goes down so does he.(And given the situation I would not be surprised to see it collapse in the next 6 months. He would be in for a very rude awakening.)
Following on this, The Economist has a very interesting overview on the ‘state of capitalism’ at present including some interesting critiques of the market for CEOs.
The Financial Times had some equally interested and related commentary a few months ago… Can’t recall who yet.
Regardless, I believe that if we lay aside econ 101 over simplifications, we can all admit that there are several different segements to a CEO market, and excluding the Owner-CEO market, I am not sure at all that the emperical evidence suggests that the market for CEO and similar level manager-agents is working very optimaly. Very clearly an area that needs to be improved as information assymetries and I would hazard a certain degree of market power on the part of a CEO enables rent extraction.
Now, in re BrainGlutton’s comments, I believe that the issue is less social class but rather connections and cronyism. Few Boards are independent, and the lack of independence on the part of directors (in addition to an exageration in the States in re rewards to upper management) strikes me as one of the driving forces.
We should also consider, as the Economist pointed out, many if not most shareholders do not act in any way like owners, but a transitory punters as they say, speculating on a short horizon and thus not generally exercising a necessary oversight.
Now to this as it seems so painfully naive.
Indeed executive pay and salary structures are very interesting issues. Best discussed, however, in the context of real information and not just so assertions.
Very good, risk and successfully taking on the risk to create value should be rewarded, as unsuccess in the same should be punished.
That, however, is a highly generalized observation that glosses over interesting questions regarding what levels of reward versus risk are truly appropriate and whether the market for the same is indeed functioning well. Are US levels of reward truly optimal over the long run? What about the agency issues we have seen in the past five years?
So what? I get compensated for my competence (I hope) not those funny degrees I have. Not ipso facto a reason for CEO or other executive compensation.
Well, I can say not being a CEO, but also not being a burger flipper by any stretch of the imagination that stress occurs up and down the hierarchy. Being rather further up the hierarchy (abstractly) than I was 15 years ago, I am not sure I feel more or less stress. Nor do I seem to have radically different hours – but then I’ve always been a workaholic, or at least so said my ex wife.
In any case, the observation is ridiculously simplistic to the point of absurdity.
So he says. I could give a fuck about that, what counts is results. Lots of workers may have ambition, work hard, not be lazy, yet also not want to be a CEO. Your half-baked example really doesn’t tell us much at all, seems rather more like a nice just so story to justify some vaguely understood precept.
For all that, yes, hard work should be compensated and yes upper management should be doing work that adds value strategically. What we’re trained to do in theory.
Does it work that way, hopefully most of the time, else bad things happen.
But then there is a lot of luck in the world. Luck, plain old luck, and don’t forget that. It’ll help the first time you fall flat on the face and everything fails. In economics we can dress it up and call it ‘exogenous events.’
Here we’re unclear, you’re contrasting I suppose implicitely blue collar versus the CEO. Fairly confused way of going about it as in many lines of business there is a lot more than CEO/Owner and some grunts.
Agents… That’s the real question.
That’s simply a stupid statement. Less risk, probably most of the time, although business failure clearly has a risk for a worker / agent as well as the owner. Less risk? Perhaps, certainly likely less agency to change the risk.
Amusing. Stupid and simplistic but amusing. I might easily write something equally facile about business risk and failure.
Again, this says more about some need to demonize workers and set yourself apart than about a rational analysis of the compensation of the various levels of agents and owners in a firm.
No need to do so.
Would he? At what stage. Is raising capital a problem for Bill Gates?
Again, rather silly oversimplification with the goal as noted.
Again more crappy self-justifying bullshit. Burger flipper may be in the position of burger flipper for many reasons, including transitory lack of opportunity – so pissing on a burger flipper as ‘lazy’ strikes me as rather empty.
I’m exec. level, I don’t feel a need to pretend that I work, ipso facto “harder” than someone down the line. Well in my new line of work that’s not relevant per se, but in the old line it was. Rather, I add(ed) a different kind of value, strategically ‘more valuable’ than the work done in lines etc. Compementary I would call it, and deserving of compensation that was scaled, but that does not make it ipso facto harder.
Of course, further to that, we still have luck.
False dichotomies - as for tough life… You come to the developing world and I’ll show you a tough life.
Again, exagerated comparisions and justifications speak more to you than to the subject.
You desperately need an attitude adjustment as well as a whole lot of seasoning.
I agree, except that even shareholders who focus on the long term rarely, if ever, put effort into exercising their ownership rights wrt the pay CEOs get for their performance. And it appears that the vast majority of CEOs are doing nothing illegal. Sure, there are the Lays and Kozlowskis out there, but they are the exception rather than the rule.
Shareholders of the world unite! Or stop your bitching…
Let me add the note that The Economist’s analysis and critique, which I highly recommend as a nice little overview on the occasion of their 160th aniversary, was not focused on criminal wrong doing per se, but an aspect of current markets that needs to be addressed. As they argue, realizing capitalism is the most effective economic system we have does not mean there are not market inefficencies to be addressed. Clearly (and as much as it pains me) executive pay is subject to agency issues that really do need to be addressed.
Well, that is a poor restatement in fact, grab the overview, nicely done.
No offense, but your wife is basically a cog in a machine. She can easily be replaced, just like any of the other cogs. Since basically all workers up to the level of sr manager are essentially interchangible commodities, they are subject to market forces like any other commodity.
What do you think? CEOs are just “born” CEOs or created by the R&D department? Maybe some are and others create their own companies, but for most the standard career path is:
College->Prestigeous Entry Level Job->MBA->More Prestigeous Entry Level Job->Jr Manager->Manager->Director->Executive Officer
At each level, the competition gets stiffer and the requirements to move ahead get tougher. If you are an average student from Average University, you may not get than Fortune 500 management training program or prestigeous banking or consulting job that sets you down the fast track to the upper levels. Even if you do get these jobs, you are competing with a million other overachievers for the next level.
Of course you can always break out of this set path at any time one you feel you have enough experience and can raise enough capial to start your own business.
If your question is “how many CEOs actually worked on the factory floor?”, I’m guessing that not that many. Of course, I might be wrong.
I believe there’s likely quite a bit of truth in that analysis, at least as far as it regards the large, publicly-owned companies that usually catch hell from the socialist left for their CEO salaries and perks–GE, Tyco, and Enron being perfect examples. My anecdotal experience is that the market is much more efficient for such services at smaller companies.
In any event, I did not mean to suggest that the market for CEO services was competitive or rational. I merely wanted to point out that the market is what determines their value, not the subjective factors propounded by the OP.
It’s always both a bit fun and a bit wearisome to see this issue come up and be met with the competing simplistic cries of “they don’t deserve it” and “they earned it.” To the corrections of those competing, unconsidered slogans that have already been posted, I will throw in a couple more.
To those that believe that it is simply good Capitalism and that all of them are earning what they are worth, I will note that a lot of people in the financial community do not believe that to be true:
Examples of CEOs paid for failing
Fortune Magazine devoted most of the June 25, 2001 issue to CEO compensation, including:
The Great CEO Pay Heist
and
EXECUTIVE PAY: “This stuff is wrong.” (As indicated by members of several boards of directors.)
On the other hand, for those who believe that the preceding articles indicate that they are all grossly and unjustifiably overpaid, I will point out that the articles mentioned say no such thing. Rather, the point is that often–not always–as a company reaches a certain huge size, various factors can interfere with the ability of the boards and the shareholders to control the executive compensation. This is hardly an indictment of the entire system, in which a great many CEOs make a lot of money, but do, indeed, earn that money by providing specific value to the company in terms of setting directions, controlling costs, and avoiding bad investments (of money or personnel).
The idea that the typical guy with a wrench (or gal with a keyboard) can look over the current costs and cost projections, market trends, current and foreseeable government interventions, current competition, improved competitive products, current product obsolecence, money supply, employee issues, payroll and benefit issues, inventory turns, customer satisfaction (not only in the quality of product, but in the sales and service areas), sales directions (where to invest sales dollars: advertising, people making sales calls, internet, distributors, etc.) and so on, and make all the correct decisions to keep the company alive and growing is silly. The guy with the wrench and the gal with the keyboard are, quite possibly, smart enough, but they do not have the experience or the specific education to pull it off.
I certainly think that more executives should talk to the guys on the line more often, to find out, personally, how those lofty ivory tower edicts are being translated on the floor. Too few executives (at every level) really understand how their companies actually work. However, I suspect that far more executives could stand on the line for a month than line workers could survive in a panelled office for a similar period.
(And, of course, the preceding articles are two years old; there are some companies that have been scaling back, now that the 90s bubble has burst.)
One of the points that the Fortune articles do not dwell on is the inability of an individual shareholder to actually have a say in the matter. So much of the stock market is dominated by insurance company and trust fund investments that it is often difficult to get enough shareholders together to actually provide a voice to the directors. The investing companies, meanwhile, have departments whose job it is to monitor the stock, but who rarely see their jobs as being one of monitoring the compaines in which they have invested. If a company starts to fall, their job is to move the stock to a better investment, not to lean on the directors to ensure that the company is run well. As long as the bubble was inflating, there was always money to be made, so there was even less oversight by the stockholders because the majority of stocks were “held” by (insurance company) bureaucrats with no interest in the company, only in the next quarterly report. (These are, obviously, gross generalizations. There are, indeed, companies whose primary income is based on their stock investments that do pay close attention to the companies in which they invest. However, the size of the investors and the size of the companies invested have both gotten so large that as a generalization, my statement still works.)
Markets *are * people’s subjective assessments, minty.
CEO-owners of businesses tend to much like the OP: brash. You have to be to take on the risk. Most of them fail because they overestimate themselves. Some succeed because they have some skill that has been poorly evaluated by established markets. And they have luck.
CEOs of large companies are a different matter. They are paid well because they hold the capital of the shareholders hostage.
Shareholders haven’t the time, inclination, information or skill to effectively monitor company performance, so they pay more than they have to in the hopes of getting someone who won’t rob them or piss the money against the wall. They select people according to their perceived performance, and judge pay according to the principle “if you pay peanuts, you get monkeys; if you pay ransoms, you get gangsters”. Unfortunately, it is rarely clear why a company performs well, so in appointing a “successful” CEO you may not be rewarding a good manager. You might simply have picked a monkey with dumb luck and be in the business of teaching him to be a gangster.
Well, as far as i could see, no-one on this thread has made the “they don’t deserve it” argument. I certainly never said anything of the sort. Most of the effort has been directed at battling the rantings of the OP, which were so ignorant as to not even require any sort of leftist or soicalist analysis to refute.
rjung’s post might have shaded close to the attitude you describe, but the presence of a winking smiley led me to interpret it as tongue-in-cheek. YMMV.
Are you talking about “institutional investors” in general because I’m a little confused? I would think that banks, mutual funds and investment firms like MorganStanleyDeanWhitter and Fidelity would dominate the stock market, not the Aetnas and Geikos.
IMHO, the reason that CEOs are paid so much is the same reason cellebrity actors and athletes get paid so much. There is a perception that these people add a value far beyond any market justification. In a sense they are outside of the market. Jack Welch (GE) gets a hundred million $ not because he is so much smarter than John Johnson, CEO of The Johnson Widget Company (who gets by on a mere $400,000) but because the Welch name is guaranteed to drive up the stock price a certain amount and make the banks and the board a boatload of money. Just like the name “Schwartzenigger” or “Jordan” is guaranteed ticket sales, even though one hasn’t made a good film since True Lies and the other is getting up there in age and retires every year.
While Clucky’s wife and the rest of us are cogs subject to market forces, the top executives are essentially subject to a diferent reality. They, in fact, by influencing perception, influence their reality, not the other way around.
Well said, msmith537
It’s also interesting that CEO’s and other very upper-level management have a lot of say and deciding what the company goals are - even if they have to come up with those goals retroactively after the original goals weren’t met.
Wouldn’t institutional investors actually be more inclined to scrutinize CEO pay than would you’ve average Joe or Joanne investor?
What ticks me off as an ivestor is not so much that CEOs are paid so much, but that many are paid exceptionally well even if they fail. Or they are paid exceeding well for very short term gains, that can be at the expense of longer term gains (as Coll pointed out above).
How much of “our” focus on quarterly returns is a function of gov’t regulation and how much is just cultural? I’d be interested in hearing from someone more knowledgeable than I on that subject.
Yes and no. While each person’s decision whether or not to purchase is a subjective assessment–Is this product worth it to me at this price?–the market is an amalgamation of every single market participant’s subjective assessments. Joe Blow is not paid $1.5 million per year simply because GigantoCorp subjectively decides that’s a good price to pay him; Joe Blow gets paid $1.5 million per year because that’s what pretty much any number of other potential purchasers of his services would love to pay him if only they could convince him to leave GigantoCorp.
I think these are crucial issues.
With regard to the latter, i think that there is a lot of pressure from investors (of all types) for rapid returns. Especially over the past few years, investors looked at the huge profit increases (not just profits, but profit increases) and decided that the trend should continue, even though any reasonable assessment would conclude that such high percentage gains could not continue long term.
It was no longer acceptable simply to post a healthy profit each quarter–the profit had to keep getting bigger and bigger. Given that such increases are very difficult without reduced costs and/or greater investments, some companies pared costs to the bone in attempts to keep shareholders happy. I think many companies adopted an attitude that basically said, “Let’s squeeze everything we can out this quarter, and worry about the next one when we get to it.”
Also, CEOs with large option deals have great personal incentive to increase stock prices in the short run. If they cash in while the price is high, the long-term value of the shares or viability of the company is not of too much concern. And yes, i know that not all CEOs think this way, but the way that some companies have been managed with only a very short-term outlook suggests that some do.
I wonder if the OP has any interest in returning to his/her own thread?
It was a general observation regarding the last half dozen of these discussions with a hope that my comment would be pre-emptive and keep the simplistic offerings to a minimum.
When you throw in the pension plans, religious investors, foundations, college endowments and similar sources of stock ownership, you get up to around a trillion dollars. That is a bit less than 10% of the actual stocks, but they often tend to cluster on large enterprises with “guaranteed” expected returns. As such, it takes them a lot longer to rouse themselves to take an active role in corporate oversight. (Note that the highest paid CEOs outstrip the CEOs at other, smaller companies where the CEO may actually be expected to perform for his salary, in much the same way that a few baseball players are making multiple millions of dollars and some are making “only” a few hundred thousand dollars in the major leagues and many less than $100,000 in the minor leagues.)
In my experience, the more I get paid at a job, the easier that job is to do. I’ve NEVER worked harder than I did when I was making minimum wage.
Also, at the last company I worked for, the person who made the most money at the company was the person responsible for the company going out of business: it was HIS job to make sure that we had work to do, he failed, and yet HE was the one who drew the largest paycheck in the company. When the company folded, we were all out of work- and yet he was the best off (the “good ol’ boy” network also ensured that he had a job again, almost immediately.
Tell me: who, exactly, is taking the biggest risk, here?
I’ve often thought that the main reason wages increase so much as you move up the ladder is to encourage you to actually move up the ladder. If you don’t get a higher wage when you get promoted, why bother doing a good job to get that promotion? It falls apart, though, at the CEO level- at that point, you’re not competing with your coworkers for the promotions, the companies are competing against each other for the CEO. That’s just wrong.
This is correct. However, there’s markets and then there’s markets. The collection of thousands, or millions of subjective assessments makes (ideally) a nice, neat efficient liquid market. However, the market for CEO’s of multinationals is small, both on the job-holder side and the job-offerer side. This makes for a illiquid, often inefficient market, which serves largely to explain the disparities and seemingly outright market failures that others are covering so well.