Thursday, June 29, 2006

Executive Compensation

While it's only a component of overall corporate accountability, Jason brings up the point that CEOs are rewarded if they succeed, and suggests that even in failure, are rewarded with significant severance packages.

First, like any other employee, a business wants to pay the CEO as little as possible, yet still enough to attract the individuals with qualifications the company is looking for.

Second, the severance packages aren't "going-away presents" - they're prenegotiated, as a condition of the CEO's service, or sometimes granted as reward for performance, as Jason mentioned. If a CEO is tanking a company, the last thing that business wants to do is give them bags of money to dig themselves in deeper before booting them. They do it because it's the cost of keeping the CEO desired around in the first place; while the CEO may not be good in the long run, if it seems like a good idea at the time, the company can bet on the CEO with compensation and salary.

Like all bets, and like all employees, they may not pan out as desired; but that doesn't mean the prior contracts can be negated - of course, if a company and CEO agree, they can have punitive measures in place in case of failure, but this is likely to just scare away the best candidates for the job.

The question always comes down to whether the CEO is worth the salary. Isn't it ridiculous to pay a single person Every month several times what a common worker might make in the coarse of a whole career in a low-paying job? It certainly doesn't seem that way to the company - if it thought it would lose money by hiring anyone, even a CEO, it wouldn't do it at all.

The CEO can theoretically destroy the company, or at least do it irreparable damage. Look at what Bush's "business" is doing to the US, as it's Chiefe Executive - wiretapping, bloating spending and debt, committing soldiers to costly, unpopular wars (I still think Iraq was a good thing, even though I don't support the war effort. Saddam gone is a blessing to the whole world, IMHO), attempting to further cement government control of marriage, free speech (flag burning), etc.

While Michael Isner didn't have the option to launch an invasion of Six Flags, or to imprison rowdy park guests and hold trials for them in the back of the Epcot Center, he still could have done tremendous damage, and had great power and responsibility of a company now worth more than 30 billion dollars. That sort of position, such a company clearly judges, is necessary to fill with a person judged worthy of the trust and responsibility. To attract those kinds of people, salaries tend to climb, if the supply of excellent candidates doesn't change.

That's about the bottom line for me - companies look out for their interests, and overpaying employees to the point where they get less from them than they pay is hardly something they're in the mind to do, even if it's the CEO.


Tim said...

Should I mention that even a generous severance package may be a relative disaster for a CEO? If they're blamed for corporate failings and fired, it looks bad, making it harder to get comparable work in the future.

Moreover, the amount of money they could make had they NOT gotten fired is often much more valuable than the severance itself.

David said...

It's funny to me how many people think a CEO's job is somehow easy or anyone can do it and thus they are overpaid. While far from perfect, Trump's The Apprentice illustrates that it's easy to get a few things right, but a good CEO needs a large basket of talents. Every candidate is already successful (at a lesser level) when they come in to begin with. But to be one of the Big Fish (the one people like to complain about) requires being one in a million.

(I remember hearing about a paper not too long ago that suggested CEOs are actually underpaid: they tend to add more to revenue per dollar than they are paid, including all benefits.)

Tim said...

Wouldn't that suggest that there's an oversupply of CEOs bidding down the salary?

Anonymous said...

So much to address....

"a business wants to pay the CEO as little as possible"
I'm not so sure. It's not uncommon for a business, at least at the management level, to hire friends (ie that horse expert who ran FEMA last year) and you don't want to shortchange a friend do you? If David worked for my comany which is worth billions and said, "Can I have a raise?" How hard would/should I think about it before saying yes? How many times has someone been promoted or given a job for internal politics and not merit, and what is keeping it from happening at the top levels of a company?

I worked for a company who hired someone who was not qualified. His position did little actual harm to the company as a whole and less actual good. Yet he still had one of the highest sallaries. He was hired and retained because of who he knew and not for what he did. It's not hard to imagine doing the same thing with a CEO.

"[severance packages] prenegotiated, as a condition of the CEO's service"
How many positions, outside of management have that and how much wiggle room is there? I don't remember talking about a severance package at any job I had. To me, negotiating a severance package is like saying you are lacking confidence your own abilties, "If I suck at this job, how much will you pay me to leave?"

And what about bonuses? Those are gifts aren't they? If not, that they are negotiated how are they a bonus and why aren't they considered sallary? A bonus is a gift to an employee and in the news we hear about CEOs of firms that had to lay off employees get millions in yearly bonuses. If they company is poor enough to have to let emploees go, then they are too poor to give someone extra money.

"but that doesn't mean the prior contracts can be negated"
Actually it does. If there is a problem during a contract, the contract may be thrown out or renegotiated. Wills are contested, so are terms of a contract with sports stars. If a contract was made in bad faith, then it's nearly worthless.

"overpaying employees to the point where they get less from them than they pay is hardly something they're in the mind to do, even if it's the CEO"
In an idealized world you are correct. But we're not in an idealized world. A business can survive even though it overpays an employee, even a CEO, if the individuals who make that decision so wish. Nothing is really stopping them. A few hundred thousand won't hurt the bigger companies. It may not even be noticed. If everyone does it, what is keeping it from getting outrageously excessive?

"CEOs are actually underpaid"
You do know that the difference between the highest and lowest paid employees has grown dramatically in the past 20 years? Are you saying the responsibilities of CEOs has increased even more?

I keep thinking about how this reminds me of sports stars. Their sallaries are huge and only getting bigger. Everyone compares their sallaries to everyone else and using it as a way to get more. But who pays for it? Us. The consumer. Worst part is we have no say. Part of my cable bill goes to ESPN which in turn goes to the players. I don't want ESPN but if I want the other channels I have to buy ESPN too. So what are my options?

I don't want to sound like "each receives what they need". I do think if you work hard or you have needed skills you deserve more. But when do you say, "enough"? OK, CEOs may earn the privilage of having the highest sallary, but how high is too high? Also since they get a share of the profits and not a share of the debt, it seems very one-sided.

If you're careful, $2 mil will tide you over for life. With some severance packages exceeding this, it still feels like they are being rewarded for failure. Worst case senerio they live in the suburbs.

Let's say there was a sallary cap at 10 mil a year. Would the effect be that bad? Companies would have more to invest in itself and improve, thus making things better for everyone. I thought that was one of libertariam's (or at least economic's) goals, to improve the standard of living world wide?


Anonymous said...

Found a factoid about CEO pay.

1976, CEO pay is 78 times min wage
2006, CEO pay is 821 times min wage

So the question is, has the responsiblities of a CEO increased by over 10 times in the past 30 years or have they been even more grossly underpaid back then? If it's the second case, I should point out CEOs were still a popular enough job to strive for despite the "low" sallary.