Are CEOs overpaid?

WorldNetDaily.com ^ | Wednesday, March 2, 2005 | Walter E. Williams

[JohnHuang2]

Are CEOs overpaid? Posted: March 2, 2005 1:00 a.m. Eastern

© 2005 Creators Syndicate, Inc.

In the wake of the Enron and WorldCom corporate scandals, the purveyors of envy have found another opportunity to preach about what they consider the evils of high CEO salaries, retirements and bonuses. After all, according to them, evil must be afoot when a corporate executive earns more in a week that the average worker earns in an entire year. Let's look at it.

Dishonest Enron and WorldCom CEOs are rare among corporate executives. As such, all CEOs shouldn't be tarnished for the misdeeds of a few any more than we'd tarnish all newspaper reporters because a few among their ranks were liars like the Boston Globe's Patricia Smith and Mike Barnicle, Jayson Blair of the New York Times, and the Washington Post's Janet Cooke.

[Sam Cree]

I don't know if CEO's are overpaid, but I'm beginning to get the idea that some college professors are.

[Fish Hunter]

Agreed. As long as the shareholders are willing to overpay the CEOs, they will get the money. Shareholders currently do not care because fools keep buying stocks. When investors start wising up and demand actual returns for the risks they are taking, the CEO salaries will correct themselves.

Excessive CEO salaries are a reflection of excessive market valuations and I do not see any reason why the government needs to get involved.

FH

[Elsie]

Would you rather own stock in a company with the lowest-paid CEO or stock in a company with the highest-paid CEO?

Not enough info.......

[RFEngineer]

"Not enough info......."

it was kinda a rhetorical question.....but, think about it.....if CEO compensation is such an important measure of a company (as some on this thread suggest), why wouldn't it be enough info to promote investing in a company that "saves" money on CEO salary......That should mean higher profits, right?

[The_Reader_David]

Indeed the solution to the actual problem, which as I pointed out is CEO compensation which is independent of CEO performance--or worse still, in the case of 'golden parachute' deals inversely proportional to the CEO's success in upholding the interests of the stockholders--is stockholder activism, including initiatives by indirect stockholders like mutual fund shareholders and pension fund beneficiaries.

How ever can you think I'm suggesting the stock market is or should be in any way socialist? Didn't you notice the implicit approval of Jay Gould's position in my contrast between it and the position taken by too many top managers these days?

The one open question is whether stockholder activism alone will suffice. It is just possible that the fact that there are proverbial revolving doors between corporate board rooms, top management, and the management of pension funds and mutual funds (which control a sizable percentage of the votes at most corporations stockholders meetings) may make assertion of stockholders property rights against their own corporations' management effectively impossible without some sort of government regulation--not of amounts of CEO and other top-management compensation--but of practices like golden parachutes which provide pervese incentives to CEOs to act against the interests of the stockholders, for whom they are supposedly fiduciaries.

Would you rather own stock in a company with the lowest-paid CEO or stock in a company with the highest-paid CEO?

Now that's a stupid question. I'd like stock in a promising start-up with a low-paid CEO, provided he or she and the rest of top management didn't have such huge stock options that when the company took off, my share of the profits would be diluted to suddenly pay them a windfall. I'd like stock in a company with a high-paid CEO who is actually earning his or her high pay by actually "work[ing] for [his] stockholders" like Jay Gould, by expanding profitability, so that dividends and/or share price increases give me a good return on my investment. I'd prefer having nothing to do with companies which offer golden parachute, or stock options not tied to CEO and top management performance, or stock options disproprotionately large in comparison to capitalization--unfortunately, as a very small investor who can only pursue diversification (at reasonable cost) by using mutual funds, and a pension fund beneficiary, I don't get to avoid companies which are enaging in such dilaterious executive compensation practices .

[Kretek]

what they do is do their jobs and add no value to the firm.

If they're "do(ing) their jobs," then by definition they're adding value to the firm. Unless, of course, management has failed its job and "their jobs" aren't corerct or shouldn't exist.

[hopespringseternal]

After having seen several great companies completely wrecked by glaring incompetents, after seeing many cases in which there was no correlation between compensation and performance, to me the answer is obvious: Many if not most CEOs are hugely overpaid.

A good CEO stays out of the way and lets his employees do their jobs. A great CEO can implement a vision to take the company to the next level.

Most CEOs get huge bonuses for harassing and worrying the golden goose to death, and have no more to do with the golden egges than the farmer. Most of them are little more than scam artists whose scam is selling themselves to ever higher bidders.

One of the most hilarious things I have seen is a worthless CEO laying off "dead wood" employees who then start another company that obliterates their old company from that part of the marketplace.

[Just another Joe]

Not only yes but HELL yes.

[The_Reader_David]

The STOCKHOLDERS are the OWNERS of the company: the CEO is merely an employee.

He (she) gets paid EXACTLY what the shareholders want.

That's the way it is supposed to work. The question is does it? There is a strong argument to be made that managers (in the corporate setting, and bureacrats in the government setting) are the West's "New Class", to use Milovan Djilas's term which he applied to commisars.

Too many proxies are voted by 'institutional investors' and thus really by managers rather than the actual owners--the mutual fund investors and vested pension fund beneficiaries. Professional managers float in and out of corporate boards. If professional managers act as a class (or an 'old boy network' if you don't want to hijack the Marxist term), and look out for each other, rather than acting as fiduciaries for the stockholders for whom they in theory work, then CEO compensation is determined not by the owners, but by other managers (those on the board, those managing mutual funds, pension funds, . . .) The abusive cases that prompted the article at the head of the thread strongly suggest that this may be the case.

[durasell]

In my experience, most people add no value or at least distinct value to a company. They are fungible -- as interchangeable as a can of tuna. They have fostered an expertise that falls within certain parameters and their jobs are designed to utilize that expertise. But they don't help grow the business.

Perhaps I used the phrase "add value" incorrectly. What I meant to say was add value beyond their job description. Every successful person I ever met has done this.

[ConservativeStLouisGuy]

Walter Williams BUMPUS!

[ConservativeStLouisGuy]

Jim Robinson's Master List Of Articles To Be Excerpted

 Wednesday, March 2, 2005

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Are CEOs overpaid?

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Posted: March 2, 2005
1:00 a.m. Eastern

By Walter Williams

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© 2005 Creators Syndicate, Inc.

In the wake of the Enron and WorldCom corporate scandals, the purveyors of envy have found another opportunity to preach about what they consider the evils of high CEO salaries, retirements and bonuses. After all, according to them, evil must be afoot when a corporate executive earns more in a week that the average worker earns in an entire year. Let's look at it.

Dishonest Enron and WorldCom CEOs are rare among corporate executives. As such, all CEOs shouldn't be tarnished for the misdeeds of a few any more than we'd tarnish all newspaper reporters because a few among their ranks were liars like the Boston Globe's Patricia Smith and Mike Barnicle, Jayson Blair of the New York Times, and the Washington Post's Janet Cooke.

Is a CEO worth millions of dollars to a corporation? When Jack Welch became General Electric's CEO in 1981, the stock market judged the company to be worth about $14 billion. Through hiring and firing, buying and selling, Welch turned the company around before he retired in 2001. Today, GE is worth nearly $500 billion, making it one of the most valuable companies in the world. What's a CEO worth for providing the brains and leadership to turn a $14 billion corporation into one worth $500 billion? How about paying just a measly one-half of a percent of the increase in value? If that were the case, Welch's total compensation would have come to nearly $2.5 billion, instead of the few hundred million that he actually received.

The Gillette Co. was in the early stages of corporate death in 2001 when Jim Kilts took over as CEO. The company's stock had lost almost half of its value in two years, and sales volume and market shares of its major brands had plummeted. Between the time Kilts took over at Gillette and this year's Jan. 28 announcement of Procter & Gamble's purchase of Gillette, Gillette's market value increased by $11.3 billion, a 34 percent improvement, and since the announcement, Gillette's value has risen by another $5.7 billion.

Kilts' salary and bonuses over the past four years, totaling about $17.5 million, haven't been especially large by CEO standards. Predictably, however, Kilts' pay and particularly the size of his compensation package from the merger – $153 million – have been the subject of media carping, particularly in Boston, where Gillette is headquartered. This figure is indeed large, but it, added to what Gillette has paid him since 2001, makes Kilts' total compensation a mere 1.5 percent of his contribution to Gillette's value.

Here are a couple of questions to you: If you were the owner of GE, and a CEO could turn your $14 billion corporation into a $500 billion one, how much would you be willing to pay that man in salary and bonuses? Or, in the case of Jim Kilts, turning Gillette from a corporation in steep decline into one Procter & Gamble was willing to buy for $57 billion, how much would you be willing to pay?

Then, you might ask yourself: If a corporate board of directors could buy a $300 computer that could do what a CEO could do, would it pay CEOs millions of dollars? By the same token, if an NFL owner could hire a computer to make the decisions that star quarterbacks make, why would he pay some of these guys yearly compensation packages worth more than $10 million?

There's another important issue. If one company has an effective CEO, it is not the only company that would like to have him on the payroll. In order to keep him, the company must pay him enough so that he can't be lured elsewhere.

If you ask me, I know of only one class of workers who are overpaid and underworked – college professors.

[Kretek]

their jobs are designed to utilize that expertise. But they don't help grow the business.

Then, management has failed. If the employees, doing their jobs - let's set aside the issue of employees not working - aren't enough for the business to succeed, then management doesn't know how to manage. They don't know how to leverage their employees, how to write job descriptions, how to assign duties, so that the business grows through the natual efforts of its employees.

What you describe - where the business only grows if employees go above and beyond their duties - is improper and exploitative.

[durasell]

Yes, you can say it's improper and exploitive. But let me ask you -- if I can get someone to do a job in the U.S. and he does exactly what he's told and not an inch or a minute or a microgram more -- then why shouldn't I ship that job off to India? Because in India I can get the same thing for about 1/10th the cost.

In regards to management -- particularly middle management -- they can be replaced as well. Top management can also be replaced, just like everyone else. The difference is this: The guys at the bottom get to go broke and scrape by forever. The guys in the middle either become consultants or buy a vender's cart at the local mall to sell stained glass and scented candles. And the guys at the top by an estate near golf courses in Florida.

The age of relying on the corporation as caregiver and provider is over. No more jobs for life. Everyone is in business for themselves and if they can't figure out a way to make themselves invaluable to a company, then they're asking to be fired at the first sign of a slow down or through outsourcing.

[Kretek]

But let me ask you -- if I can get someone to do a job in the U.S. and he does exactly what he's told and not an inch or a minute or a microgram more -- then why shouldn't I ship that job off to India? Because in India I can get the same thing for about 1/10th the cost.

Actually, you'll probably get less due to culture and languiage issues, not to mention shipping stuff back and forth and the risk of conducting business in an environment not protected, as it were, by American laws.

I refuse to accept that "110%" is the minimum acceptable level of performance. That's fraud. Offering pay for performing according to a certain job description, then saying that isn't enough, shows either an intent to screw the employees out of work for which they won't be paid, or incompetent management not writing the job descriptions correctly.

[durasell]

This is an interesting conversation. The first time I've put these thoughts on "paper." So, thanks for that.

I don't know what "110%" really means. One person's 60% is another person's 100%. The trick is hiring good people. The best boss I ever had let me come in at the civilized hour of 10:00 a.m., didn't enforce a dress code, and gave days off after the crunch time was over. One night I'm finishing up some work with a colleague and casually said, "How many hours did we work last week?" He shrugs. So, we sit down and do the total. Holy crap, the boss had us working between 65-70 hours a week without knowing it.
The guy has an instinct for hiring people who would work themselves to death for a few perks and reasonable money. Oddly, it was about the most fun I ever had in an office.

In regards to getting equal value off shore -- language issues aren't a problem in India and any shortcomings are more than made up by the low, low everyday prices.

[radicalamericannationalist]

"But the idea is very simple -- someone/anyone's salary is tied to the amount of money they can make for the person they're working for, whether that be a single individual or a bunch of stockholders."

Do the words "Carly Fiorina" mean anything to you? How about "Michael Ovitz?"

Are all CEOs overpaid? Of course not. Neil Cavuto's book had excellent examples of CEOs who were willing to tighten their belts to help their companies through lean times.

But it does appear that by negotiating contracts in which utterly failed CEOs can be canned and still get millions of dollars, the boards of some pretty major corporations have violated their fiduciary duties to stockholders. I think that's the real story, why have boards abdicated their essential responsibilities.

[durasell]

Both Ovitz and Fiorina are out. Fired. Canned. Pink slipped. Shown the door. And otherwise pursuing other interests in which their former employers have wished them luck.

Do they have to work in their lifetimes? No. Have their children's, children, children been assured of a pretty bright future? Yep.

More importantly, both would have seemed like pretty good bets when they were hired. Ovitz built a powerhouse agency from a card table in his livngroom. Fiorina seemed like just the thing for the 21st century.

In regards to compensation, anyone is worth what someone else is willing to pay.

[radicalamericannationalist]

"In regards to compensation, anyone is worth what someone else is willing to pay."

Yes but that boards of major corporations, not unsophisticated actors here, have negotiated that individuals who have been in your words "Fired. Canned. Pink slipped. Shown the door. And otherwise pursuing other interests in which their former employers have wished them luck" shows something is very wrong.

Did Ovitz and Fiorina seem like good bets? Sure. But does a deal that makes you a multi-multi-multi-millionaire in spite of colossal failure seem like a good bet? Would you hire an employee and say, "Oh, by the way, even if you are a complete screw-up and I fire you, I will pay you gobs of money?"

[FreedomCalls]

The classic example of overpayment is Michael Ovitz of Disney. Fifteen months "work" and $140 million in compensation.

Nobody is worth that, especially if he left the company in worse shape than when he arrived. You could hire 1000 managers at $140,000 each for the same amount of money.