It's Not Just CEOs, the Top Pay for MLB Players, Oprah, Criss Angel, Cesar Millan is "Out of Control"
The CNBC discussion above focuses on the question of whether CEO pay is "out of control." LA Times business writer Michael Hiltizk say Yes, and in a recent LA Times article he cited this Harvard Magazine article that reports that the "Ratio of Average CEO Pay to Average Worker Pay" has increased from 107:1 in 1990 to 344:1 in 2007.
Big deal. The ratio of the median salary of the top 25 highest-paid Major League Baseball (MLB) players to the median U.S. household income has increased steadily from 70:1 in 1990 to an estimated 374:1 for 2010, an all-time historic high (see chart below).
In the same way that there are only a few hundred athletes in a given year who are talented enough to make it into the elite group of world-class athletes who earn multi-million dollar salaries, there is likewise only a small group of individuals with the necessary skills and talents to lead large corporations (average CEO pay in 2009 was $9.2 million for the S&P 500 companies).
And in the same way that the top athletes can command higher salaries each year because of increased fan interest in sports (domestically and globally) and increased competition for those top positions (domestically and globally), CEOs can command higher salaries because of increased global competition and bigger markets, and bigger companies. Just like the highest-paid athletes deserve to make more today than their counterparts in the past, the CEOs of Ford, Caterpillar, Johnson & Johnson, and McDonald's deserve to make more than their counterparts of the past. The markets today for cars, machinery, consumer products and fast food are not only much bigger today than in the past, both domestically and globally, they're much more competitive and challenging and the CEOs who can face those challenges deserve to make a lot of money.
We rarely hear anybody say that the pay of athletes, musicians, movie stars, entertainers is "out of control," and yet many of those celebrities (Oprah, Tiger Woods, Michael Jordan, Criss Angel, Cesar Millan aka The Dog Whisperer, etc.) ARE CEOs, of their own multi-million dollar enterprises. And as Reason's Katherine Mangu-Ward pointed out in the video, the CEOs don't write those checks to themselves, so we should realistically assume that market forces play a large role in determining CEO compensation, just like we should assume that Alex Rodriguez's $33 million salary this year is determined largely by market forces.
26 Comments:
Most people do think that the money they make is ridiculous, but at least it's generally obvious where it comes from and why. With CEOs... well, it's convenient to poke at what you don't understand.
MP's assumption is that CEO pay is grounded in a free market where merit matters. In the past decade or two, that does not appear to have been the case.
Athletes & Entertainers are perfect examples of meritocracy in pay. Are you really saying that CEO pay packages are the same?
Large pay packages for CEOs of public-companies are often examples of governance failures on the part of Boards of Directors & Comp Committees. It is often symptomatic of the 'good-old-boy' network, fellow cross-directorships, conflicted Comp Consultants, and at the margins, outright control fraud.
Are CEO's truly negotiating with disinterested, non-conflicted parties? Or are they implicitly colluding with captured Board members?
What happens when every CEO salary is set at 75% of their peer group?
What happens when CEOs are paid based on nominal stock price increases in a bull market, with no adjustment for relative performance?
Should anyone be upset at exit package for Mark Hurd, or is questioning that an affront to the free market?
I bet MP is against proxy access, too. Can't have the shareholders actually deciding what CEO-led Boards do, can we?
"the CEOs don't write those checks to themselves, so we should realistically assume that CEO compensation is market-determined"
That statement is patently ridiculous to anyone what has real world experience in a business.
The pay of athletes, musicians, movie stars, entertainers is "out of control". CEO pay, on the other hand, is "under control" - and that's the problem.
The Libertarian in me says that CEO pay is up to the payor - if they are comfortable overpaying for poor performance it is their right to do so.
The unsaid part of the criticism is that if we trim CEO pay then the front line workers will be paid more - and the economist in me KNOWS that will not happen...
But the bigger concern should be the gap between private and public sector pay and benefits - this has gotten some coverage - but not enough IMHO...
We now have a firmly entrenched public sector that does very well compared to it's privat sector counterparts - and will vote to keep things that way.
Worth reading is a recent book by ultra hardcore right-wingers Redleaf/Vigilante, entitled "Panic."
They say publicly held companies are examples of "weak ownership," in that unorganized and not involved shareholders have little real method for controlling their companies or management. They can sell. They cannot exert control, or carefully husband their assets, except in those occasions where a single shareholder gets control or influence.
You do have to wonder: If a wealthy individual owned Oxy Petroleum (the publicly held company), would he have paid CEO Ray Irani $900 million in the last 10 years?
On the other hand, entertainers and athlete salaries are pretty much performance based. Who can bring in revenue? They do not determine their own salaries, aided by a carefully selected compensation committee.
Therefore, sentiments that CEOs of publicly held companies are overpaid have a great deal of validity.
Dr. Perry needs to consider the weak role of shareholders play in determining CEO compensation at publicly held companies.
Steve, I don't understand some parts of your comment. If you don't think CEO pay is correct, then what should it be? Who should decide?
If CEO pay isn't negotiated in a free market then what kind of market is it? As to merit, I'm not privy to anyone's contract, so I don't know what's in it, and I can't possibly tell whether they met their objectives. We would like to think there was some connection to company performance, but the fact is we just don't know, and it's not our call.
Keep in mind that if I think a company is paying too much and is perhaps hurting their bottom line, I can sell that stock & buy a company I feel is better managed. If I'm NOT a stockholder, I don't see why I should care. If bad decisions are made, a firm may soon be out of business, and that's as it should be.
You said: "Are CEO's truly negotiating with disinterested, non-conflicted parties?"
Well, I hope not! Why would you want someone hiring a CEO or any other employee to be disinterested?
"What happens when every CEO salary is set at 75% of their peer group?"
What does this even mean? How would that be possible? I don't understand.
"Athletes & Entertainers are perfect examples of meritocracy in pay."
Help me with this, Steve, You're OK with Nicole Kidman making $20million per movie; Kobe Bryant playing great basketball is worth $35million/yr and $158million in 2007 wasn't too much for whacking a little white ball long distances with great accuracy, but the CEO of a multi billion dollar corporation doesn't deserve $10million. Do I have that right?
IMHO most of the whining that goes on about CEO compensation is pure class envy. "It's just not fair that that guy makes 300 times as much as I do!"
"Dr. Perry needs to consider the weak role of shareholders play in determining CEO compensation at publicly held companies."
Do you mean those helpless insurance companies & pension funds?
"Therefore, sentiments that CEOs of publicly held companies are overpaid have a great deal of validity."
Sentiments have validity? Come on, Benji, you can do better than that.
Who should decide CEO compensation? You? Me?
I have to agree with a lot of what Steve wrote. I have been personally involved in a shareholder fight that tried to remove a CEO. It was not possible to get lists of shareholders and their share holdings from the Secretary of the firm. We had to advertise in newspapers to try and address shareholders prior to the annual meeting. The CEO had most of the officers on his side because they had employment contracts presented along with an undated resignation statement when they accepted their positions.
There are a lot of similarities with CEO athlete/celebrity pay, The pay is claimed market based, when the markets are really small quasi-open market like "Eco-systems." Many times there are agents working for the candidate who use data in a way to get the best deal for the candidate. And the ROI for CEOs, athletes and celebrities has been falling.
Conversely, as several commentators have already stated, there is more meritocracy in athlete and celebrity pay. I believe this is because it is very easier to measure success in those industries: RBI = $$$, More movie tickets sold = $$$. Athletes who don't get it done don't make top dollar for long. However, a CEO can spin conflicting data to cronies in the boardroom to determine his/her bonus. And let's face it, the board members who brought in some CEO wunderkind would have a hard time explaining how the chosen one is not a success, worthy of some reward.
All that being said, in my opinion CEO pay is out of control because the returns for the talent is isn't in line with the increase in pay. (6x increase in pay since 1990 had better yield a 6x increase in profits)
And I have yet to see a solution that isn't un-American, illegal or flawed with potential unintended consequences.
So count me in amongst those that don't like it, but don't like where the "solutions" lead more.
It seems, athletes and entertainers attract more fans than CEOs:
Fanatic: A person marked or motivated by an extreme, unreasoning enthusiasm.
Fans seem easy to exploit.
I am appalled! I have missed this gravy train! As a CEO of a small company, I make less than minimum wage, less than my staff. I must be the only CEO on earth who isn't rolling in money.
Or is is SOME CEOs who make so much money, like some entertainers, athletes, authors, brides (and Grooms), Ferry workers (in Washington some make nearly $500,000 annually), inventors, code writers, app developers, sales persons, real estate tycoons, etc, etc, etc.
The argument seems to me to be a convenient red herring and media nugget to generate mass anxiety about a quantifiably minute issue. Minute in number of high paid CEOs and in terms of total dollars relative to the economy.
"Large pay packages for CEOs of public-companies are often examples of governance failures on the part of Boards of Directors & Comp Committees. It is often symptomatic of the 'good-old-boy' network, fellow cross-directorships, conflicted Comp Consultants, and at the margins, outright control fraud"...
Well Steve I do believe you might have a valid point here but if you have nothing substantial and credible to back it up with, then what's the point worth in the real world?
Still can anyone come up with a satisfactory way to set CEO pay that doesn't involve some folks who know who the CEO is and what he/she is about with regards to experience and previous track records?
Remember the only real alternative shoppers and stockholders have is to take their money somewhere else if they think the CEO is overpaid and underperforming...
Paul, what are you doing wrong? I thought all you CEOs made buckets of money. :-)
I suspect your story is the more common one.
"The argument seems to me to be a convenient red herring and media nugget to generate mass anxiety about a quantifiably minute issue. Minute in number of high paid CEOs and in terms of total dollars relative to the economy."
I believe you have hit the nail on the head, sir.
Do you remember how this liar expressed outrage at the idea of AIG executives getting bonuses after $180billion in taxpayer money had bailed out AIG even though it was his bill that authorized them? The bonuses, which the employees were entitled to, amounted to less than 1/10 of 1% of the bailout money, but that's where our anger was redirected by those in government.
Executive pay is still being used to deflect our anger away from those in congress who should be the ones feeling the heat.
Jason is right, while not wildly different, celebrity pay has more meritocracy, while most of the pay of CEOs is determined by board members who are themselves usually CEOs of other firms...
More to the point, Paul, I am sure you are not poor owner of this site (though he seems like an excellent CEO and conversely uber rich) getting just a $1 per year :) At least he determined his pay!
Sorry, Ron H., if you can allow yourself, please re-read Steve's comments a bit slower, hope you will get it.
Gotta agree with Steve and Jason, several flawed assumptions in the original post. While there may only be a small group competent enough to be CEO, that group is still much larger than the select group who actually often get those few CEO jobs. What often happens is that dumb boards of directors way overpay for "star talent" rather than searching for cheaper value. It is exactly analogous to sports owners who way overpay for the superstar athlete, rather than cultivating their farm system or finding value players to sign. Occasionally you see teams like the Pistons or Patriots during the last decade who go this route in sports, but they are the exception. Today's CEOs don't deserve to make more just because their overall markets are bigger, they need to actually win more of that business to deserve it, which often isn't the case, not to mention all the stockholder proxy problems that squelch real market forces.
And entertainers are actually a bad comparison, as they are even more overpaid, benefiting from the limited distribution of broadcast media during the last century. Entertainment markets were winner-take-all tournaments as a result, because there were only 3 TV channels for decades or most movie theaters only played 5-10 movies. However, with the rise of the internet, this is all about to be seriously upended. We are about to see one Katie Couric making $10 million/year be replaced by a 100 online news anchors making ~$70k ($7 million in total so it will even cost less :) ). So while there are significant market efficiencies right now that lead to these outsized salaries, it's all about to be competed away by superior technology, so those wringing their hands over it, as though somehow these episodes of market mispricing can ever last, are either being too short-sighted or are frankly ignorant of how technology and markets destroy these inefficiencies.
There's an inherent negative bias towards CEOs, because sometimes they have to cut costs, including labor costs (and offshoring jobs), to maximize profits. I doubt that will increase the fan base.
Also, CEOs are too often under attack by government, and there's ignorance of the real value they create for society.
Government too often competes rather than complements the private sector. Also, in the 2000s, Wall Street, for example, created and captured trillions of dollars of real value in the global economy for U.S. society, which is almost unnoticed.
If public company CEO pay is excessive, why do private equity firms like KKR pay their executives more than what public company executives get? As an owner of closely held private firms, KKR presumably has the information and influence to get things done as they demand. I suspect they know a lot more than Steve does on this matter.
Quote from Steve: "Athletes & Entertainers are perfect examples of meritocracy in pay. Are you really saying that CEO pay packages are the same?"
Yes, that's partly what I'm saying. The other part is, how is it any of your business?
If you think a CEO is paid too much, then don't buy that company's products, don't buy their stocks.
Are you in favor of robbing all those who you think have more than you think they deserve? When you enact laws that arbitrarily limit pay, that's exactly what you're doing.
It could be argued that athlete salaries have been distorted by public financing of stadiums and local cable tv monopolies. And that entertainer salaries have been distorted by copyright and other factors.
And CEO pay has been distorted by some statist privileges that wouldn't be seen in a free market.
But these are just arguments that we need a freer market, not an argument that salaries should be "controlled."
The ratio of average person's pay to a CEO's would be much different if government were not taking 63% of GDP (federal, state, local) - 44% in government spending and 19% in the cost of regulations. If government weren't so greedy and powerful, the pay for workers could go up a lot. In 1950, government was about 30% of GDP. If we had that ratio today, pay for everyone else could double.
There's your lack of a free market - the business of the United States is big government. We are now Europe - high unemployment, stagnant wages and slow growth. We will stay that way until government is cut back to reasonable size.
I read (Forbes?) that the CEO(?) of Siruis XM Satellite radio was one of the top paid male executives.
Has that company ever posted a profit?
I'm all for free-market capitalism etc... but it's obvious something else is at play with CEO salaries esp. when they get the nice exit package for doing a shitty job.
Pay-for-performance should be implemented across all sectors. If a movie bombs (e.g., Jennifer Aniston) she shouldn't get paid millions esp. when the actors aren't making the monetary risk (in most cases).
If a movie bombs (e.g., Jennifer Aniston) she shouldn't get paid millions esp. when the actors aren't making the monetary risk
In markets where employees take no risk you expect their pay to be lower than it otherwise would be. Look at baseball contracts, for example. Since pay is guaranteed regardless of performance or injury, one would expect owners to pay less to compensate for that risk. That's why sports owners accept contracts with pay guarantees: it lowers their payroll costs.
"I'm all for free-market capitalism etc... but..."
Usually when I read something like this, I can look forward to reading something indicating the writer is NOT in favor of free market capitalism.
And here it is:
"Pay-for-performance should be implemented across all sectors."
Who should do this implementing? Please don't suggest more government interference in the market.What business is it of ours if private firms pay CEOs some amount we think is too much? Just what IS the appropriate amount?
Please provide examples of CEO pay you think is too much, and what you believe the appropriate amount should be, and why you believe it.
I think you're making the assumption people aren't corrupt and self serving.
I'm on my phone right now so I'm not going to search for specific figures but when an executive drives a company into the ground he/she shouldn't be rewarded with millions to leave.
It shouldn't be the govt making the decisions. The boards need to be more responsible with pay for the best interest of the shareholders/owners.
"I think you're making the assumption people aren't corrupt and self serving."
Actually I believe ALL people are self serving, and that's OK.
"..when an executive drives a company into the ground he/she shouldn't be rewarded with millions to leave."
I totally agree. However, unless I'm part of that company, I don't see that it's any of my business. I believe in some cases bad executives are bribed to get out right away before the end of their contract so further damage can be avoided. Sort of like early cancellation penalties.
"It shouldn't be the govt making the decisions."
We agree on that.
"The boards need to be more responsible with pay for the best interest of the shareholders/owners."
I agree with this also, but again, unless I'm one of those shareholders, I don't consider it any of my business. If a company suffers due to overpaying its CEO, then oh well, too bad.
As a stockholder I can vote my preferences and opinions, or I can decide not to hold the stock of a company that I think is acting stupidly. Funds holding large blocks of another company's stock could certainly influence CEO compensation, but they don't seem to do so. Perhaps it's not as big a problem as we think.
I didn't really expect you to provide actual numbers, I was only asking what you think CEO pay SHOULD be in some case if you can say that it is currently too much. I have no idea what the correct amount should be, so I can only view with envy and marvel at the huge numbers.
"Mom, he got a bigger piece of pie than I did!! It's not FAIR!!"
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