Ok, so if a company is making a billion a year in net revenue, high CEO salaries make a little bit of sense. If the shareholders believe the CEO can make a material difference to the bottom line of a company - personally make decisions that result in it either making 900 million or 1.1 billion on the very next year - of course it makes sense to reward them with a massive pay package.
What I don’t understand is why they consent to massive “golden parachutes” - tens of millions of dollars in compensation when an executive leaves, even if it is after overseeing a company that was failing. I also don’t understand why the shareholders agree to pay a CEO more than minimum wage (a million a year or something barely enough to pay the rent at that level) if the CEO doesn’t manage to lead the company to profitability.
Either way, all this money given to compensate a single person is money taken right out of the pockets of shareholders. Why do they consent to this? One obvious theory is that corporate voting apparently doesn’t work much better than national level democracy and the voters are failing to vote or are ignorant in some way. But how can this be? Votes are proportional to shares, and you would expect major shareholders of a publicly traded company to either be massive institutions or very wealthy individuals.
Either way, they would not consent to a CEO getting to loot the company. Why would they agree to that? Every 10 million a CEO takes is dividends or future company value they aren’t getting.
This. Hiring a CEO or other senior executive positions is a bit different from interviewing some guy off the street because HR sent you their resume embedded in an Outlook Calendar invite. Rightly or wrongly, the relative rarity of people with track records of running billion dollar corporations allow them to command large compensation packages and regulatory requirements tend to make those packages a bit complex.
Keep in mind that “shareholders” don’t usually hire and fire CEOs. The board of directors does. And in many cases who actually sits on the board of a large company is a bit of a convoluted structure that can have little bearing on stock ownership. Often there are conflicts of interest as well (i.e. the board being padded with the CEO’s supporters)
This was covered in s couple of classes I took in an MBA program. The shortest version is that boards of directors for big companies tend to be made up of CEOs of other big companies. They all have their hands in each other’s pockets.
When I went to several Annual Shareholders Meetings, it was rather disappointing to sit through an hour of speeches explaining how awesome the Company is doing, some critical questions being waved off, and then the voting, where 80% of the Shares are in the Hand of a few People, and no matter what the People on the floor vote for, it doesn’t Change a Thing.
Even if the shareholders on the floor Held all votes (no Investment funds), voting “no” on “do we give our trust to Management and board of directors for what they did the past year” doesn’t Change anything. A no vote tells the Board and Management “we the shareholders are deeply unhappy that you messed up big time”, but it doesn’t dissolve the board and create new elections.
When new positions are open on the board, most cases one candidate applies. So even if you vote no, all that happens is that the place remains vacant. That doesn’t help Change the politics of the board, either.
HR will do a “survey” to ascertain what is the current contract package for a company like theirs. They will always come back with amazing numbers, including really great golden parachutes.
These HR reports are very influential to institutional investors whose companies also enjoy the benefits of this kind of salary calculations. They also help set the pay of the board of directors.
The CEO, whether a new hire and given a new contract, reciprocates by throwing money at HR so it becomes a bigger and more powerful department.
The amount of mutual back scratching in beyond belief. Bankrupt companies will often pay ex-execs a fortune (without any contractual requirement) to hang around as “consultants” afterwards. Earning money for no work. This is the new owners rewarding the old execs for the nice work of bankrupting the company so it could be bought cheap.
If it’s not clear to the OP (I found it just a tad murky above), separation agreements are usually negotiated at the time of hiring, not when a C-level quits. Some terms are adjustable or based on performance, but a failure leaves that kind of position with a $100m bonus because he was assured it on signing.
That’s pretty much it. The Board of Company X will approve huge salaries and insane benefits packages because Board members are likely CEOs of other companies who can then say to their own companies “Look what [Company X] is giving its CEO; this company should match it”. And their Boards in turn will approve pay increases for the same reason. It’s very incestuous, and anything that raises the industry average will benefit the individuals involved personally in the end.
I think that people don’t really understand what a “golden parachute” contract really entails. It’s not a payment to the CEO or other executives if they decide to quit. It normally is an agreement to pay the executive a large payment if the company is acquired and the executive is fired without cause.
Companies get bought and sold regularly these days. When this happens many times the new owners want to put in place the executives of their choosing. If you are a CEO and you join XYZ company and there is risk that your company may be acquired and you may lose your job, you want to be compensated for that risk. The cost of the golden parachute payments are typically born by the new owners. They should know these costs as a part of their due diligence and they factor it into the costs of acquiring the company.
It is not just private companies. How about the rotating door for school superintendents, or the boosting of pay in final years to increase public pensions?
The people truly making the decisions are not the stockholders/citizens, and are not acting in the interests of the stockholders/citizens.
Ok, so it was agreed upon ahead of time. The next question is why aren’t CEO pay packages subject to comparable competition for wages that every other job is.
I mean, if I went to even an elite school and want a software developer job, they aren’t going to offer more than maybe 125k. Lots of other kids went to elite schools, after all, and also, how much better is an elite graduate compared to an H1B who takes 60k and will work 16 hours a day? No doubt an elite graduate is better…but more than 2x better if they work half as much? Maybe not…
So one would think that plenty of folks who went to Wharton Business school or some other elite group and who did well on mere hundred million dollar companies would be out there. Enough to keep CEO wages vaguely reasonable. I mean, ok, maybe the number of billion dollar corporate CEOs is small, but surely the difference between a “hundred million” company and a billion dollar company is a few zeroes on a spreadsheet, right?
A CEO isn’t some magic genie who can make money appear, it’s a man or woman who can only process data according to a mixture of reasonably well founded business principles and a little bit of intution/talent/luck. Paying them 100 million a year doesn’t somehow get someone who can work more than human limits of about 16 hours a day or read at more than normal human rates or talk at much faster than normal human speeds. So only so much data can flow in, and given that data, decisions can only be made up to a certain level of accuracy. CEOs are still human beings.
I dunno, it’s just hard to equate this with any kind of reasonable valuation. If I’m a coal miner and I’m the strongest man who ever lived, I’m only maybe twice the speed of my peers at best. It doesn’t make sense to pay me more than twice what they make. Mental data processing is abstract but subject to limitations as well.
One would think that there would be tens of thousands of corporate leaders who went to an elite business school, have 20+ years experience, no major strikes against them, and who could sit in a CEOs chair and do a reasonably good job of it. You would think this reasonably large pool would keep CEO wages reasonable.
Ok, so it was agreed upon ahead of time. The next question is why aren’t CEO pay packages subject to comparable competition for wages that every other job is.[/qupte]
Several people have already explained it. Boards of directors are made up largely of people who get CEO packages at other companies, so while they don’t benefit from one individually high package, they benefit from keeping the average high. If I vote for ABC and XYZ corp to pay their CEO $100 million, then when I am CEO of DEF corp I can point to the average CEO compensation of $100million as a justification for my salary. CEO pay is essentially decided by other CEOs engaging in collective bargaining, even though a lot of them would oppose a traditional union. Also, this didn’t happen overnight, it’s not like someone said ‘we’re going from paying a CEO $250k to $100 million this week’, it’s something that’s been happening over decades. So there’s never been one staggering jump, it’s been very gradual. Here’s some stats I grabbed, and they match the general trend I’ve seen in multiple sources.
Oh. That’s messed up. So while a mixture of anti-union propaganda and voters voting against their own interest have killed off most union jobs, CEOs are getting de facto the same benefits as a union and using them to basically pay themselves like kings. If that’s really true…wow.
Government itself is part of the problem. I’m going to probably get jumped on for even suggesting this, but shouldn’t the FTC regulate excessive CEO compensation? Paying one person 100 million dollars doesn’t somehow magically give you a genie or make them work harder than if you only pay them 10 million a year. These pay packages, if other comparable talent is available for less, should be a de facto violation of a member of the board of director’s fiduciary duty to shareholders.
The compensation isn’t a gift. The people involved doing the hiring believe they need this person’s talent. You have to look at it also from the prospective of the person being made the offer. They are very likely already highly compensated and have stock options and grants they would loose out on if they left the job. In many cases asking them to relocate their entire family to take the job too. And like anyone else, they can be fired immediately for any reason or no reason. So as a new CEO, you have to protect yourself that if you are fired, you need something which isn’t going to harm you financially. After all, if you leave your current job giving up compensation worth many millions if you simply stayed, you aren’t going to take another job where they fire you a month later and now you lost out on the job and millions of dollars you would have gotten if you had stayed in the old job.
An excellent CEO can make a huge difference for a company, look what Steve Jobs was able to do for Apple Computer when he returned to the company. A lesser CEO which is what Apple Computer had at the time, was heading towards bankruptcy. There are many other companies that have been turned around by new management, or those that joined and really grew the business.
Also, a company’s long-term success isn’t just about how much more money it makes immediately the year the new CEO is hired. It is about achieving other business objectives such as increasing market share, acquisitions or related industries or to take the company in a better direction for the future.
If anyone wants to see an example of people who don’t know how to run a business, you can look no further than your own town. The many retail shops and restaurants which come and go within six months, or hang on for a couple of years and then fold. It is because they don’t have the special talent it takes to run a successful business. Because if they did, they would be there for many more years to come and be opening additional locations. Yeah, there are standard reasons for their failure: Lack of foot traffic, bad location, less demand for their products, etc., but an excellent executive would know how to handle those things, because the evidence is clear by those businesses which have been around a very long time and keep expanding.
There are a few guys, like Jobs, who really are worth every penny they’re paid. But most of those truly top-end guys don’t ask for a salary: They ask for performance-based pay, like stock. Why shouldn’t all CEOs be paid based on their performance?
Well, OK, we all know the answer to that: Because most of them know they can’t perform like that, and they’re the ones making the decisions about their own compensation.
I mentioned Steve Jobs, because he is well known. There are many others who have done good things for their companies, but you don’t hear about them in the news because their product or services aren’t that interesting to consumers.
Companies have different objectives as I mentioned, and it isn’t all about what the sales were for that year. But the news likes to report on that aspect only to further demonize them for getting such high compensation. It is a business, and if they could hire a CEO for $80K a year and get the job done, they would do it.
They do it because it saves them money.
Say you want to hire Jane Doe as a CEO but she has a job where she makes one million a year as an exec at a large firm. In order to get her you will have to pay more than $1 million, and offer $2 million From her perspective there is fifty fifty percentage chance of succeeding and getting the $2 million and failing and getting nothing. That means your offer is only worth $1 million and she stays. In order to get her to come you have to offer her $3 million, or you could get her by offering $2 million a year and $1 million dollar golden parachute. That golden parachute means you can offer her higher expected value while keeping the salary lower.
CEOs can make a huge difference positive and negative. When it was announced Steve Ballmer was stepping down as Microsoft CEO the stock went up $18 billion dollars.
a. The base concept of Apple products is refinement. Instead of selling a product for the a competitive price that you have put the least effort into engineering to get it out the door, refine it until it’s great, and then refine it some more. Don’t cheap out on poor quality components to save a buck, that hurts your brand, and don’t ship devices with advertising or bloatware, that hurts your brand. They aren’t perfect in this regard, or unique, but this is a genuine adding of value compared to the rest of electronics companies.
b. Steve Job’s initial iPhone presentation and his later ones were groundbreaking. It was also apparently all smoke and mirrors, the iPhone, at that point in development, was still a bug ridden mess that barely worked. Jobs rehearsed and rehearsed and made certain demands of his engineers that obviously paid off big.