Posted on 09/15/2007 4:39:17 AM PDT by Kaslin
If someone wants to bash corporations and the "excesses" of raw capitalism, there's no easier target nowadays than CEO pay. Recently critics were in a tizzy over a report claiming that CEOs make 364 times what the average worker earns. For example, in this MSN article Michael Brush declares:
In recognition of the just-completed Labor Day weekend, I'd like to offer a salute to American workers, who the United Nations just reported are second only to Norway's laborers when it comes to productivity.
And now, a bit of bad news for those same workers: You're not getting credit for that productivity. Instead, top executives at your companies are reaping the rewards in the form of increasingly fat paydays.
It's sad that this is the level of economic literacy among the media. If the press ignored advances in other scientific fields as much as they do in economics, we'd see weathermen advising readers to offer sacrifices to the rain gods.
What Mr. Brush apparently doesn't realize is that there isn't a fixed pie of income, such that high pay for CEOs necessarily translates into lower pay for workers. He's also ignoring the fact that competition impels companies to pay workers what they're generally worth. If Company A were paying its workers $25,000 per year when the workers were really adding $30,000 to the bottom line, why wouldn't Company B offer them a few thousand dollars more to switch?
In our increasingly global economy, certain individuals are incredibly productive and can command incredibly high earnings as a result. Corporate executives really do perform valuable tasks, and it really does make a difference who is running the company. Once we concede that productive individuals will earn more than less productive ones, the fact that some make 364 times what others do is largely irrelevant. After all, a TV set might be 364 times more expensive than a gumball. Is that "unfair" or does it merely reflect the forces of supply and demand?
Fortunately, some financial commentators would concede my points above. What these people object to, however, is CEOs making a bundle even when they fail. This viewpoint is expressed in a recent BusinessWeek piece by Bill George:
The public is outraged these days over CEO compensation, with good reason. Far too many chief executive officers get paid large sums even when they don't perform. I believe that CEOs should be well-paid when they do perform, but there is no justification for paying for nonperformance.
Now this raises an interesting question: Why in the world would shareholders agree to compensation schemes that are so "obviously" ridiculous? It offends the public (and Bill George) when Home Depot's "former CEO Bob Nardelli [received] a $200 million termination settlement after declines in market share and shareholder value." Yet the people who should really be upset are Home Depot shareholders. Are we to conclude that shareholders care less about their money than outside observers?
Let's not rush to judgment. It's risky to take a job as CEO. Highly talented individuals know that, despite their best efforts, they might perform poorly. Indeed, maybe a company has dug itself into such a hole that nobody could prevent the stock from falling. Now imagine that you are such a person, and you could (say) get a sure $10 million working in some other capacity with much less stress. Your other option is to take the job as Home Depot's CEO, where you will earn $250 million if the stock price goes up, but $100,000 if the stock price tanks. Does that sound like a good deal? Would Home Depot attract many qualified candidates with such a proposal?
Obviously I am simplifying matters, and in the real world companies have all sorts of mechanisms to align the long-run incentives of management with the shareholders. My point, however, is that the typical critic who spends five minutes thinking about the issue often overlooks the large element of risk. If corporations don't want to simply hire daredevils, they will need to have lucrative contingencies in place in case things turn sour. No one objects to this at the lower levels, either: If the stock price tanks, nobody expects the janitor to give back half his salary.
Finally, I should deal with the objection that in the real world, shareholders can't exercise control over management. This is true to varying degrees. But the market has an elegant solution to bloated management who fritters away shareholder value: the corporate raider. Ironically, the government's restrictions on so-called hostile takeovers make it harder for shareholders in large corporations to clean house and install managers who will look out for their interests. As usual, the imperfections of the marketplace can be traced to the unintended consequences of earlier government interference.
Also, if you took that Home Depot exec’s settlement and divided it equally among workers they might each get a bonus of $200. Then Dems would sneer that it is not even enough to buy a muffler.
Also, if you took that Home Depot exec’s settlement and divided it equally among workers they might each get a bonus of $200. Then Dems would sneer that it is not even enough to buy a muffler. Distribute it as a dividend, and each one would get much less.
All Dems flunked basic grade school math.
Be careful. There is plenty of this “CEO-envy” going on here on FR.
Be careful. There is plenty of this “CEO-envy” going on here on FR.
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Having been the sole owner and CEO of my own microscopic corporation for about twenty years in the past I have some understanding and I don’t object to multimillion dollar paychecks if they are earned. What I do have a hard time understanding is a situation such as we have had with one local industry. The CEO and his buddies are well paid while the company slowly bleeds to death. Four years ago the CEO got a large bonus while the people doing the work got a large pay CUT. The company lost millions and the employees took a cut while Mr. Wonderful received a bonus greater than most people’s total net worth. The term most often heard as a description of his management style is “idiotic”.
Here’s a good defense of CEO pay: People should mind their own damn business, and quit envying what others have. A private corporation can pay its employees anything it wants.
> If Company A were paying its workers $25,000 per year when the workers were really adding $30,000 to the bottom line,
> why wouldn’t Company B offer them a few thousand dollars more to switch?
I have no comment on CEO pay. But as to why companies may underpay workers in some areas, there are two reasons.
1st, for many workers the company makes no analysis of the worker’s actual contribution to the bottom line. Therefore there is no basis for determining whether those workers should be paid more — or less.
2nd, in way too many companies the “horizon” is at most 3 years, often it is only the current year. The people who make the decisions regarding workers pay would rather pay the workers as little as possible, and accept attrition as the good workers leave, because they themselves believe that while in the long run this will damage the company, they don’t care about the long run because they don’t plan to be there. In other words, they accept long term damage in exchange for short term expense reduction. In fact, they even LIKE the attrition of the good workers, because that is also an expense reduction. And they get their bonuses not based on what will happen in 5 years, or 10 years, but what happened in the previous year. A 5% expense reduction can result in bonuses of several hundred thousand dollars for these senior managers — so they do it, and leave before the damage is revealed.
If stockholders are stupid enough to hire an even more stupid CEO, they get what they deserve.....bankruptcy.
Why should Company B do that when they can get them for $25,000? Companies do not pay people for what value they add, they pay them the least amount that they can get away with.
In our increasingly global economy, certain individuals are incredibly productive and can command incredibly high earnings as a result.
And then there are people like Nardelli, who failed in the only measure that CEOs care about - stock price - and still collected over $200 million in severance for a job badly done.
It's risky to take a job as CEO. Highly talented individuals know that, despite their best efforts, they might perform poorly.
Let's face it, it's riskier to be an employee these days. You can do the best job possible, and if your CEO decides that the best way to add a few bucks to the bottom line is to lay you off then you're history. And without anywhere near the severance package your CEO would get.
No one objects to this at the lower levels, either: If the stock price tanks, nobody expects the janitor to give back half his salary.
If the stock price tanks then the janitor may well be laid off, resulting in giving back his enire salary.
He's talking about public companies.
I think this misses the point, its how the compensation is set in the first place.
How many shareholders actually knew about the golden parachute, and with the way the laws are structered, what kind of power would they or do they have about it?
If there is transparency to the process and open, impartial decision making by the board, then God bless the CEO for what he gets, but if its a situation where the CEO and the board decide each others compenstion, you create a perverted system that harms the shareholders.
I do not believe in CEO Envy, I feel happy to see guys get paid, and it really is none of my business, since its not my money to decide what they are worth (except when I am a shareholder). However, as a shareholder, its hard to clarify or do much now a days, to in terms of compensation, shareholder advocates don't wield as much power as they used to, and the boards have become stronger at fending off challenges, while getting paid in a process that is a sham.
However, I learned in economic history that America has always had labor scarcity. That has fostered high wages and technological innovation. As a former manager and business owner, I will testify to the predominant sentiment among employers. It is hard to find good help. A good employee is invaluable and worth his weight in gold. You pay the going rate plus to get him and raises to retain him. Unfortunately, bad employees are truly in the majority. Usually, one can't tell who will be good until you try them out.
Wages usually constitute 50% of an operating budget. They are a much bigger item than CEO pay. Hence productivity makes or breaks a business. Because the CEO is responsible for the business model and its implementation, that is his ultimate responsibility. Some CEOs are hired into difficult or even impossible circumstances. They wouldn't undertake the jobs if they thought they might not get paid. Neither would you. Would you go to work for a company that made paying your wages contingent on company performance?
And anyone who goes to a company stockholders meeting knows how often enough votes are gathered to overturn the CEO’s proposals.
In a few years the deck gets stacked with cronies on the board, and he on theirs....
I don't have to wonder how many talented people would have signed up for that "risk" for a more modest golden parachute. Indeed, if the executive insists on such a bailout because he lacks ANY confidence that he can get it done, I'd hire someone else, if for no other reason than that I'd want a person who saw recovery as effectively a matter of life and death.
This is total BS.
I personally think companies can pay executives or any employee whatever they feel like. I don’t have to invest in the companies though. Especially the corrupt culture where ceo’s and other executives sit on each other’s boards of directors. And then approve incredible compensation for each other, regardless of performance.
Another issue is employee morale. You see companies cutting back on wages and benefits for the frontline workers, and asking for them to sacrifice for the health of the company.. the guys who do the actual work, while approving big bonuses for the executives.
I don't think any person should own a semi-automtic firearm.......sound familiar?
Very few [CEOs] get fired outright, and when they do, they take millions with them.
Did you know that CEOs have a shorter employment term with a company than the average employee? Did you know that CEOs get 'fired' far more frequently than average employees?
The millions they take with them were agreed to by the shareholders....the true owners of the company. If you don't like it, go buy a company and pay the CEO $35,000 per year and see where you go.
I hope you realize that applies to the CEO as well!
If stockholders are stupid enough to hire an even more stupid CEO, they get what they deserve.....bankruptcy
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I doubt that the CEO is really stupid regardless of what he may be called. I suspect the truth is that he has been very successful at borrowing money to lose as witnessed by the huge debt load this company has. So long as someone is dumb enough to loan the company money the CEO can draw his big salary while the company goes further in the hole. I don’t expect it will be too much longer before the money supply is shut off and it is all over. Most stockholders have little say in the matter as the CEO has always been a major stockholder himself.
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