An update on CEO pay - followup

doitover wrote: Dr Hess is correct, it isn't a free market, it's largely controlled by a relatively small group of people. It is an example of how free market theory breaks down.

I'm with doitover here. I think it's a small group of people who collectively kiss each other's arses. They also collectively watch each other's back so that they can go from company to company to earn their next shyster paycheck. They also market themselves to each other, and to the in-bred business world, to keep the gravy train rolling.

One guy who has my undying respect, and he's a CEO, is Jim Sinegal. Check out an excerpt from his wikipedia entry:

He is known for a benevolent style of management that offers employees high benefits and rewards. According to documentation provided by Costco Wholesale Corporation, in fiscal year 2007 he earned $350,000 in base pay, with additional monies coming from bonuses, stock/option awards and other compensations, totaling $2,981,202 million. This is considerably less than the CEOs of Costco's competitors.

My kind of guy. He puts his ego in check to ensure his company not only survives but assists his workers. They have some of the lowest turnover, and stock stolen aka shrinkage, in the industry.

Here is another article that is well worth reading if your interested. I talks about how Costco realized that happy workers equals profitability. Article on Sinegal's and Costco's worker relation philosophy.

>Costco realized that happy workers equals profitability

Seems almost self-evident, doesn't it?

Wait... and which airline isn't going bankrupt or having to charge extra B.S. fees?

I read an article in the paper today that CEO pay raises this year are way way ahead of inflation. Even companies that are performing miserably. Just does not make sense to me. Why do stockholders put up with this?

Also recently there was an article that several CEOs are getting severance packages after they die!!! One gets several million $ to not go to a competitor after they die.

Screw that! I'll run a company into the ground right here in the good ol' US of A for $50k/yr!

Again, CEO's are hired because of their anticipated ability to make money for the company (or lose less). (Theorectically, admittedly), just like with sports stars, if Company A didn't pay superstar executive $xx, Company B would pay $xx-1.

Jack Welch was mentioned earlier. Let's use that as an example. Since he left GE stock has not done well... at all. Now had GE not hired Immelt as CEO, some other company would have paid him the same if not more.

Now is GE's stock failure Immelt's fault? Could an alternative CEO done better? Or would an alternative CEO lost more? You could take the position that since GE stock has done poorly, Immelt was a poor choice and/or a waste of money. You could also make the case that Immelt was by far the best choice, even in hindsight.

That's why the free market aspect is important.... intelligent, informed people can arrive at different conclusions... those who feel strongly about a position put their money where their opinions are...

You can say it's not a "free market" because it's relatively incestuous. You could say the same thing about the NBA (or Hollywood where for a supposed meritocracy a surprising numbers of the top actors' parents were also in the business)... there are a select group of people qualified/experienced to play the game at that level. And most of them (like Immelt) put in their dues at much lower levels for long periods of time in preparation in playing in the big leagues... sacrifices that the average person would be absolutely unwilling to make.

The really huge salaries you read about are typically tied to stock performance... think a sports star or movie star would take that sort of deal where 80-90% of their pay was tied to how the movie did at the boxoffice?

The golden parachutes are typically negotiated ahead of time. If you had the ability to say to your employer "since you want to hire me so badly, should you ever decide to fire me you'll continue paying me $xx' wouldn't you?

Many of you seem to think that "anybody" could be a CEO at this level and do a job equal to or better than the high priced CEO's. That's as silly as saying the average fat American could play in the NBA just as well as the high priced players. The average fat American would likely fare better in the NBA than at the GE Corporate office...

Are there overpaid CEO's? Absolutely. No question about it. But you can't "fix" that without penalizing the ones that aren't overpaid and bring serious value to their shareholders.

Or maybe we should limit top NBA salaries to 10 times what the towel boy makes... or star salaries to a multiple of what the key grip makes.

Heck, just nationalize it all and pay everybody $400/month (like an MD or a garbage man makes in Communist countries...)

Bill

Well, Bill, you do bring up an interesting point. ASSuming that CEO's are terribly overpaid for what they actually do (for the most part), what could be done about it? From a regulatory standpoint, I don't see much of anything. You can't legislate morality and you can't legislate against stupidity, or we would have no government. So, strike out any type of governmental action. That leaves the stockholders. Now there it gets interesting. See, it turns out that a lot of these corporations, like, F for instance, have two levels of stock. There's the family stock that might be a small percentage of actual shares, and there's everyone else's stock. Now, the family stock just happens to count ten times as much as everyone else' stock when it comes to voting time, like for voting for the BoD's. This isn't one share one vote. It's one share and we'll just take your money and you can go suck eggs and hope the price goes up while we vote ourselves special dividends or control. Theres your problem. If the family wants to take our money, then they should put up with the shareholders voting their asses out if the berkeley it up.

We find ourselves in agreement here to a point... in those companies where the family (or some controlling group) owns a controlling share of the stock, there is a very easy solution... don't buy the stock! ;-)

The stock drops, the family's worth drops, and they can't afford to make stupid executive pay decisions.

The fact that enough people are buying the common stock in situations like these means they have the confidence in the family (or controlling group) to make decisions on their behalf that are in the best interest of the company, even if they can't directly affect those decisions once the stock is bought.

Sort of like voting for President... ;-)

Bill

WILL YOU STOP THAT!

We don't vote for president. There has not been a President elected in years by the people. We elect our local officials who sell out to the highest bidder to the candidate their party chooses to be President then runs against a candidate from the opposite party in a PR campaign against a committee called the Electoral College.

Since we all know "electoral" means "where we choose" and college means "center for beer and casual sex parties" we can conjugate the sentence as meaning the Electoral College is the place where the elected officials "choose to screw our living conditions up for their own gain".

Type Q wrote: I am waiting for the day that signifincant shareholders demand investigating outsourcing of executive management. If you can find the same (or better) caliber of leadership in Europe or Asia for millions less, the excutive offices should go to Europe or Asia. Any US CEO and and earning 2.5x what a Japanese or German CEO earns for running a similar company, better be delivering 2.5x return to the shareholders. If not, he or she should be replaced with someone cheaper. Isn't that the way free markets (and globalization) are supposed to work?

Hey nice idea...too bad the CEO is the very last thing that would be outsourced in a company. The CEO would be sitting in an air-conditioned shed with a laptop hooked up to a VPN, a video conferencing setup and some Roombas running around first, and would still be getting paid more. It's the biggest money hole, you'd think they 'd go after that first...

I wonder how many plants would have closed and how many workers would have been laid off if you didn't have a good guy at the top?

I'd just love to see on of the guys on the line crying about the inequity of it all try to run the company. It just won't work!!

Pay the top guys the big buck. They work for it. They know how to run a large corporation, the little guy doesn't have a clue what is involved.

Actually the majority of division CEO's (each division works as its own company and in most cases would be a Fortune 500 company on its onw) in my business are "outsourced" and are not American in origin. We pick the best folks in a worldwide market and pay them well.

I have (and have had) the opportunity to put myself into one of the career paths that could prepare me for such a position. Frankly, I'm just not willing to work that hard... I'd rather be paid moderately well, work "only" 60-70 hours a week, have better job security (the lifespan of those highly paid CEO's is short...), and still have time to have a life.

Wonder how many hours those who complain about excessive CEO salaries average per week?

Bill

Oh, and I keep seeing comments about what a huge effect CEO pay has on the overall company spreadsheet ("it's the biggest money hole, you'd think they'd go after that first"...)

Pick any company where you think the CEO is "overpaid" and see what percentage his pay is to the overall business. I think you'd find it's inconsequential...

Changing the sourcing of a single circuit board would likely make a larger impact in the average company...

Bill

There are CEOs like Chambers at Cisco that have earned every penny they have made. There are probably many more examples of CEOs and upper management types that know more about gaming the system than they know about running a company.

Anyway, that isn't really the point. The point is that upper level management really isn't accountable to anyone. Stockholders don't count because so much stock is controlled by mutual funds. Investment by the little people has probably over inflated the value of companies in general because the individual investor knows nothing about the companies they are invested in and probably don't even know in what companies they are invested.

There is a reason that Bush was so excited about personal control of Social Security accounts. It was pretty apparent that the market was going to crash early in his first term if there wasn't a substantial injection of bubble chasing cash put into the market.

Anyway, enough ranting, I have no idea of what the answer to the problem is either but that doesn't make it any less irratating.

carguy123 wrote: I wonder how many plants would have closed and how many workers would have been laid off if you didn't have a good guy at the top? I'd just love to see on of the guys on the line crying about the inequity of it all try to run the company. It just won't work!! Pay the top guys the big buck. They work for it. They know how to run a large corporation, the little guy doesn't have a clue what is involved.

Bill, I wouldn't say inconsequential at all. Take any billion dollar company. Let's deal in million dollars for the math. Now, lets say the CEO is paid, total now with all the "goodies," 20. These numbers are not unreasonable. With 1000 in total sales and 20 in salary just to the CEO, that's TWO BERKELEYING PERCENT of total sales for the year just to one person who mostly just travels around and tells the employees to work harder for less and sell more product and reduce costs. And if you want to look at it from the aspect of percentage of net income or net loss, it gets even worse. If a billion dollar company breaks even for the year and paid 20 mil to the CEO, that 20 mil would have been profit.

Like I said, I bet we could find someone named Ghupta to do this job for 50K/yr.

Find me a billion dollar company whose CEO makes 20 million.

I used to work for a billion dollar public company, and the CEO didn't begin to remotely approach making 20 mil a year.

Give me an example that's not theoretical. In my experience a $1B company is unlikely to pay a CEO $20M with none of that being equity-based pay (negated if we assume a company breaks even and ends with an unchanged stock price).

(Putting it in persepctive, $20M is what Immelt of GE made last year... inclduing equity-based pay.)

if the company broke even but the stock price increased, then the shareholders gained...

Bill

I don't care what CEO we're talking about. There is no way the guy makes enough of a difference, esp in a company that is losing money, to earn 300 times what the average worker in his company earns. NOT POSSIBLE. I don't care how many hours he works or how big his over inflated ego is.

This is especially true of a company that is losing money OR is in worse shape than when the guy took over the helm in the first place.

That was the point of my article. Even when companies are losing money, initiating layoffs, etc the CEO's are still getting fat pay raises, bonuses, et al.

It makes no sense. What company rewards a worker for doing an extremely poor job?

If the tide was turned and we were talking about Union guys making too much you'd be the first in line to complain and run them into the ground. Since it's about CEO's you're all "Pay'em as much as they want! They deserve it..market forces...blah blah blah". Elitist much?

If individual Union salaries were determined by the Market like CEO salaries were, they'd be getting what they deserved, not some negotiated average that dissuades above average performance and equally rewards above and below average productivity.

I understand how strongly you feel about a single person not being able to have that significant of an effect... unfortunately history proves you factually incorrect in that assumption. A CEO can add billions to a company's worth (witness Jack Welch) by being respected by the market.

Your position that the effect he has is not worth 300 times an average worker isn't supported by the market or by practical application (what 300 GE workers could have had the same effect on stock price that Welch did?) though you can take the position that no CEO should ever be paid 300 times the average worker no matter what his contribution to the company just because it "isn't fair."

Again, the pay packages are negotiated BEFORE the CEO's performance, based on his projected performance... NBA superstars still pull down tens of millions when their team has a losing record... and Kevin Costner still banks huge paydays even after Waterworld and The Postman... ;-)

Bill

A good CEO is worth a whole lot more than 300 times the salary of the average worker.

The average worker simply is not equipped to handle the job. And how well the CEO does his/her job determines if the average worker has a job.

And anyway do you want an "average" guy determining the direction your company will take and it's profitability? Not me, I want someone that's well above average for that job.

When they hire someone in to help stem the tide on a failing company it's even more important to be able to hire a person who can do the job.

Xceler8x the fact that you can't even comprehend the fact that the person running the company makes that much of a difference just shows you don't really understand how a company works.