Wednesday, January 02, 2008

Maybe CEOs Like Jack Welch Are Underpaid?

Aren't CEOs overpaid? Here's part of George Mason economist Walter Williams' column today:

What about complaints about CEOs earning so much more than the average worker? Before looking at CEOs, let's look at another area of huge pay differences. According to Forbes' Celebrity 100 list, Oprah Winfrey earned $260 million. Even if her makeup person or cameraman earned $100,000, she earns thousands of times what they earn. Among the celebrities earning hundreds or thousands of times more than the people who work with them are: Steven Spielberg ($110 million), Tiger Woods ($100 million), Jay Leno ($32 million) and Dr. Phil ($30 million). According to Forbes, the top 10 celebrities and athletes earned an average of $116 million in 2004 compared to an average of $59 million earned by the top 10 corporate CEOs.

When Jack Welch became General Electric's CEO in 1981, the company was worth about $14 billion. Through hiring and firing, buying and selling decisions, Welch turned the company around and when he retired 20 years later, GE was worth nearly $500 billion. What's a CEO worth for such an achievement? If Welch was paid a measly one-half of a percent of GE's increase in value, his total compensation would have come to nearly $2.5 billion, instead of the few hundred million that he actually received.

Bottom Line: You could probably make a stronger case that Jack Welch was underpaid and exploited by his shareholders and GE's Board of Directors than making a case that he was overpaid as a CEO.

9 Comments:

At 1/02/2008 12:06 PM, Anonymous Marko said...

I would like to ask anyone that thinks CEOs are over paid if they plan on applying for the position for less money. I am guessing their resume would be rejected. Also, I like to ask the same people if they own stock in the company, and if not, why do they care what the CEO is paid? I also ask them if they think Oprah is over paid, so it is nice that Williams and I think so much alike!

 
At 1/02/2008 1:40 PM, Blogger Walt G. said...

As a stockholder, I appreciate an effective CEO/executive who can multiply the value of my investment. That type of CEO is worth whatever they can receive for their abilities.

Also as a stockholder, I don’t like paying to remove ineffective leadership through golden parachutes, or paying hidden compensation through backdated stock options. That type of abuse must end.

CEOs should be paid whatever they legitimately and transparently earn in an open market. Whatever that amount may be. Not everyone can be a CEO.

 
At 1/02/2008 2:38 PM, Anonymous KJ said...

Knowing GE well I can assure you Welch was grossly overpaid for the value he actually added...much of it belongs to the workers and division managers.

 
At 1/02/2008 3:07 PM, Anonymous Alex said...

Walt, your second and third paragraphs seem to contradict each other. Could you clarify something?

What is to say that "golden parachutes" and "backdated stock options" are not legitimate, open market forms of compensation for the career risks and personal sacrifice to which one is exposed when they take the job of CEO in a massive, public corporation?

 
At 1/02/2008 5:26 PM, Blogger Walt G. said...

Fair enough—I can see where people would detect a contradiction with my remarks, but my thinking is actually an explainable paradox. Here are my thoughts on the subject.

I don't like fooling the stockholders by hiding compensation (undisclosed backdating of stock options). If they want to do it, OK, but don't hide it: Free markets thrive on transparency and information.

The premise of pay for performance is negated when there isn't any positive performance (golden parachutes). If the CEO is taking credit and PAY for things when they are going well (whether he or she is actually the reason), then, let the CEO take the blame and NO PAY when things are going poorly (whether he or she is actually to blame).

If corporations operated with stockholders in mind there would not be any reason for expensive and stupid legislation such as the Sarbanes-Oxley Act. Latent backdating of stock options and golden parachutes are not in the stockholders’ best interest. They are sneaky, and they are wrong.

 
At 1/03/2008 12:18 AM, Anonymous Anonymous said...

Executive Compensation 2.0: Porsche Leads By Example

Look at how Porsche has structured the compensation of CEO Wiedeking: he receives 0.9% of Porsche’s profits, but had to pledge all of his personal assets for the benefit of Porsche in case he fails.

 
At 1/03/2008 1:55 PM, Anonymous Marko said...

It's funny how people that say we should not tell people how to run their countries (think Iraq) have no trouble telling people how to run their companies. This is particularly funny when they don't own shares in the company or work for the company.

 
At 1/03/2008 6:03 PM, Blogger Walt G. said...

Many people don't know their exposure to publically traded stock, but much (most?) stock is owned by institutions.

Do you have a pension? Do you have a life insurance policy or car insurance policy? Do you have mutual funds?

Whether you know it or not, these companies' performance, policies, and CEO pay affect your pocketbook. This IS your business. Are these types of action OK with you?

 
At 1/09/2008 2:06 AM, Anonymous Anonymous said...

I assume that your analysis make no allowance for the value added by the all the other employees.

Well so be it. As a shareholder I am much more concerned with the value added by the R&D group than the c-suite. In any case I can assure you that most of the value comes from the bottom up.

But if you belive that the CEO is worth all that money then why do you think they are all back dateing options and getting golden parachutes. I mean if they are worth it and the data shows it should not the market speak and there options will vest as they should..

 

Post a Comment

Links to this post:

Create a Link

<< Home