Wednesday, April 09, 2008

CEO Pay Debate: Who Knows if $40M is Too High?

Washington Post business columnist Steven Pearlstein thinks CEOs are overpaid, and writes about it unconvincingly in his column "Off Balance at the Top." He also appeared on CNBC's "Kudlow & Company" tonight in this segment and said, "As a general rule, CEO pay levels are too high. $12 million is not outrageous, but $30 million, $40 million, $50 million, that's too high." Don Luskin then pretty much destroyed Pearlstein.

Comment 1: I guess that means that means Oprah is overpaid at $260 million, along with Tiger Woods ($112 million), Johny Depp ($92 million), Howard Stern ($70 million), Oscar De La Hoya ($55 million), Phil Mickelson ($51 million), Shaquille O'Neal ($35 million), Kobe Byrant ($34 million), etc.

Eugene Fama: If it’s a market wage, it’s a market wage. They may be big numbers; that’s not saying they’re too high. It’s easy to say that people are paid too much, but when you’re on the other side of the fence trying to hire high-level corporate managers, it turns out not to be so easy.

Thomas Sowell:
Many people who have never run one business for one day are nevertheless confident that they know corporate CEOs are not worth as much as they are paid.

Comment 2: There's a very good reason for that average CEO pay has risen by a factor of about 7X from 1980 -2003: there was about a 7X increase in the market capitalization of large companies during that period (see red line in graph above for market cap, vs. blue/green lines for CEO pay), according to this
forthcoming QJE article by NYU business professors Xavier Gabaix and Augustin Landier.

16 Comments:

At 4/09/2008 11:37 PM, Anonymous Anonymous said...

And when a company is bleeding money and the stock is sinking fast the CEO that is paid a "market rate" says it could have been much worse without his expert hand to guide the ailing company.

Why not pay the CEO for results and penalize them for losses? If they are worth $40 million a year then they should be willing to put everything they have personally on the line--just like they are asking the stock holders and employees to do.

 
At 4/10/2008 5:50 AM, Blogger Walt G. said...

How can someone be overpaid if both sides agree? Hiding executive pay from stockholders or bookkeeping that does not reflect the actual value of the company for stockholders is, or should be, illegal.

 
At 4/10/2008 8:03 AM, Anonymous Is said...

I think stock options and other incentives are a good idea. If the CEO does a good job and the stock goes up, he or she makes more. It's a good way of tying pay to performance. Of course, when the company (& stock) does well, the CEO is criticized for making too much money. Personally, I believe that CEO's should make whatever the market dictates.

Anon, asking someone to put everything on the line is a horrible idea. You won't attract the best CEO's, and you will only end up with someone who is willing to gamble, doesn't have much to lose, and is most likely unqualified. How are employees asked to put everything on the line - their net worth, their home, etc.? That's just silly.

 
At 4/10/2008 8:33 AM, Anonymous Anonymous said...

Trade gap widens to $62.3 billion in February


Americas biggest export. Dollars.

 
At 4/10/2008 8:44 AM, Anonymous Anonymous said...

"Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit."
Gordon Gekko

 
At 4/10/2008 8:48 AM, Blogger spencer said...

The dominant reason market capitalization increased seven fold over this period was the impact of lower inflation and lower interest rates on the PE or the future value of corporate earnings.

Since WW II the trend growth rate of earnings per share has been 7% and there is no evidence for a break in trend around the period that CEO compensation started accelerating.

If from 1945 to 1980 trend growth rate of EPS was the same as from 1980 to 2005 what did CEO's do after 1980 that they did not do prior to 1980 to earn so much greater compensation?

 
At 4/10/2008 9:33 AM, Anonymous Is said...

It may be harder to maintain the same level of growth now than in the past given greater competition from European and Asian economies that recovered from their industry infrastructure decimation during the war. These recoveries took decades.

Regardless, I believe Spencer is basically asking what is different about American industry of post 1980 versus 1945 - 1980. Globalization, advances in information technology, threats of terrorism, instantaneous effects of interconnected global economies, etc. make it much more difficult to maintain that growth. There are volumes of literature on these subjects. CEO's deal with more problems, more competition, and more uncertainty than in the past. Given that the job is more difficult and results have continually been delivered since 1980, compensation should and has gone up.

 
At 4/10/2008 9:57 AM, Anonymous Anonymous said...

Anon 8:03

Wendelin Wiedeking had to stake his entire personal wealth to become CEO at Porsche in 1992. At that time Porsche had a market capitalization of about 300 million Euros.

Reportedly his compensation includes 0.9% of the corporate profit.

In 2006 he earned over 60,000,000 Euros of which 53 million was from that 0.9% of the corporate profit.

 
At 4/10/2008 12:20 PM, Blogger bobble said...

well, its NOT a MARKET RATE. its a rate set by consultants who know they won't get hired next time if they determine a 'market rate' that is too low.

 
At 4/10/2008 1:15 PM, Blogger Walt G. said...

bobble,

If the board of directors hires the consultant(s) to find the best CEO to maximize shareholder value, why wouldn’t the consultant(s) be hired again if they are successful?

If that’s not the case, either the board of directors, or the consultant(s), are not doing their job and shouldn’t be hired or appointed again.

The dollar amounts of market capitalization and executive compensation are staggering and not what the average person commonly deals with. I just want my stock value to increase as much as it can. If it takes high CEO pay to accomplish that goal, so be it. I don’t mind sharing a much bigger pie.

 
At 4/10/2008 2:23 PM, Blogger bobble said...

walt said:
"If that’s not the case, either the board of directors, or the consultant(s), are not doing their job and shouldn’t be hired or appointed again."

right. and how easy is it to change the board of directors? this is the real problem. there is no accountability. even when corporations stumble, you rarely see the board members lose their positions.

 
At 4/10/2008 2:44 PM, Anonymous Anonymous said...

Two factors have driven CEO pay:

1. The very transparency demanded by shareholder activiists has helped to drive up CEO salaries. Once CEOs started to compare their salaries with other CEOs, they decided that they were underpaid. Negotiating executive salary packages became a specialized consulting service.

2. Supply & demand - there are very few who want the job of a CEO; look at the Business Schools like Harvard and what one finds is that grads are more interested in high salaried positions in investment banking than the onerous responsibilities of running a company; upside on the credit crisis is that this may change

During a financial downturn, it is very easy to assign blame but one should also recognize that being an armchair critic while underpaid is one of the easiest jobs in the world.

 
At 4/11/2008 3:55 PM, Blogger juandos said...

Not to worry though, Hussein the Insane Obama has a plan to take care of that greedy capitalist nonsense...

The first-term Illinois senator has introduced "say-on-pay" legislation that would give investors more of a voice in setting executive compensation packages.

He said the legislation needs to be approved immediately but later acknowledged to reporters that getting the bill moving quickly in the Senate could be tough.


This ought to make the socialists in the crowd just wet themselves with glee...

 
At 4/11/2008 5:43 PM, Anonymous Is said...

Juandos,

Sounds like more typical say one thing and do another Obama b.s.

From your link, "the legislation Obama [is] promoting is non-binding and would not cap or limit CEO pay".

It sounds like a good way to appear tough but still be able to wink to the other side as he has done so many times. This is the same as he is opposed to NAFTA, would pull out the troops immediately, and didn't hear controversial statements in his church.

 
At 4/13/2008 4:52 PM, Blogger David said...

CEO pay should not be considered in isolation but in conjunction with the pay of other senior executives. I've seen studies showing that when there is a huge gap between what the CEO gets and what his direct reports get, investment returns are likely to be inferior.

 
At 4/23/2008 1:13 PM, Anonymous Anonymous said...

1980 was when the 'New Conservative' (NeoCon) Republicans came to power and began eliminating and reversing all the controls that reasonable administrations and congresses had instituted since FDR began them, to save America from the great republican depression. These conscienceless mentally myopic NeoCons do not care about Americans - only an imaginary 'America' which to them is just a place to get rich. Unfortunately for the rest of America(ns), 'rich' now means not $1 million (the standard for the previous 100 years or more) but $100 million. $1 million now barely buys a house and a comfortable retirement, and 80% of Americans will never even have that much. But CEOs have upped their own compensation 700 percent while most real Americans have managed a mere 70% increase in those same 28 years. That geometric difference is creating a tidal wave of inequality. The American Dream is dying, and it's all the NeoCon's fault. Blame NAFTA on the Clintons. VOTE OBAMA!!

 

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