CEO compensation or We Haven't Done Class Warfare This Week

via Calpundit.

Burn the witches!

interesting article. surprising that studies show that the CEO has such a huge impact on company success. obviously, you would expect them to have an impact, but i never would have thought that “a decision to choose a new CEO is almost as important as a decision to switch sectors.”

i’d like to see numbers on how having a well trained, well compensated, satisfied and motivated workforce has an impact on company success.

The question then (although its Harvard Business School, so treat it with tongs) is why CEO compensation used to be so low/is so high now. Why would the importance of executives change?

Yeah anyway. I spoke with several of my MBA friends, and they say that this (workforce motivation) is almost never taught. I call it “trench economics”. heh

  • Alan

The Economist has been covering (superbly) the issue in its various aspects. This article from the 9th print edition is a much better look into how and why executive compensation has gotten so out of whack in America. Unfortunately you need to be a subscriber to access the full text. You want to be a subscriber.

The Harvard study reference in the original article isn’t a determination of whether effective executives are worth a specific level of compensation. The study was research into the area of leadership and performance, not finances. The tie-in in context with the article should be viewed in that light.

That said, the following make for some fascinating reading:
http://www.harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml;jsessionid=1IICOF4GTPCFWCTEQENR5VQKMSARUIPS?id=5831&_requestid=33251
http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml;jsessionid=L4BLXO0XIFXI0CTEQENSELQ?id=U0310E

It used to be that the primary skill that CEOs needed was domain expertise – they had to know the market of the company’s business well. Now, that’s almost irrelevant, or can be picked up on the job – busineses are much more sophisticated now, and more skilled leadership is needed for accessing public (and global) markets, adapting to changing markets, investor relations and corporate governance, dealing with significantly more industry regulation…plus the fact that public corporations are just much, much biggers and more complicated - with diverse products, tens of thousands of employees, operations in mulitple jurisdictions, etc.

You’re also just ignoring the bottom line – the primary reason for the increase in CEO compensation is market demand. Good CEOs can have a huge impact on company performance, and returns to stakeholders, and there’s very few people who have the necessary skills (and endurance) to perform at the necessary skill level, in the same way that there’s few actors that can add as much to a movie’s boxoffice as Tom Cruise, Mel Gibson, etc., or athletes such as Michael Jordan, etc. (and if you want to see a really screwy increase – compare how much actors and athletes make now, compared to 40 years ago, or the same period that you’re using for CEO compensation comparisons).

That all said, I do think option compensation isn’t necessarily a good thing, at least in the quantities that are currently typically doled out to CEOs. In private tech companies, for instance, the CEO typically gets 10-15% of the company in options, while the entire development team might get an aggregate of 5%, which is retarded, in my opinion. But it’s damn hard to attract a good CEO without that level of compensation (especially to tech companies over the past few years).

You’re also just ignoring the bottom line – the primary reason for the increase in CEO compensation is market demand.

I think the market for executive compensation is broken, but I could be convinced otherwise. I just don’t see how it could have exploded like it has, year after year.

I don’t think the superstar effect is relevant for executives; it’s not like one executive can manage more than one company.

What type of metric is used to judge CEO performance apart from the rest of the company? If you can actually prove that its a CEO that made his company perform, then great.

Is it the workforce? The employees? External forces? What makes companies succeed? I mean, look at GM. They hired a bunch of “branding experts” from Procter & Gamble to make and sell cars, and they were absolutely horrible at it. They just had no clue about cars, and the Japanese and Germans clobbered them in everything except trucks! The superstar management that did wonders for P&G just fucked over GM.

From what I can tell, with “Superstar” CEOs, Past performance is no indication of future performance.

I have to admit to having completely loast faith in CEO’s and Wall Street. CEO’s today have only one incentive at the major public companies. Maximize percieved values on Wall Street so the share price goes up so their options are as large as possible. Builiding for more then the next quarterly report is counter-productive. Today’s “Star CEO’s” actually seem only good at running companies into the dirt while chasing short term goals driven by stock price…Do I sound cynical? I am… Tell me why Fleet had to merge with Bank of America? Tell me why AOL was able to buy Time Warner? Tell me why Amazon - which barely can scratch out 1% of profit on billions of dollars in revenue is heralded as a “great buy” stock and Bezos is one of these “stars”…

It’s actually consistently by far the best indication of future performance, for Fortune 1000 companies, let alone Fortune 500 cos.

I mean, look at GM. They hired a bunch of “branding experts” from Procter & Gamble to make and sell cars, and they were absolutely horrible at it. They just had no clue about cars, and the Japanese and Germans clobbered them in everything except trucks! The superstar management that did wonders for P&G just fucked over GM.

Sure, and it’s the CEO who’s accountable for that performance. Being a big-time CEO is basically something that you only get one shot at in life – as soon as you fail, you’re out, and you’re almost never going to get a similar job again. It’s an extremely high pressure, highly skilled, high risk – and accordingly, high reward, position.

Like I said, the one area that’s broken, in my opinion, is the extensive use of options as compensation – because while in theory options align the executives’ interest with those of the stockholders, that’s not in fact the case, since they are far more motivated to spur short-term share price increases as opposed to longer term growth. It also results in executives having tremendous winfalls as a result of market shifts unrelated to their performance.

CEO performance is easily the most important factor in determining company performance, at least for established companies with hundreds of employees – anyone who thinks otherwise really doesn’t understand the (business) world.

Of course I think that a CEO should also have to lose a lot of the compensation if profits fall. If you look at the graph carefully, you will note that CEO pay scales in greater proportion to PROFIT over time, rather than whatever it was keyed to before.

This means that the CEO is far more responsible for the company performing well.

Of course I think that a CEO should also have to lose a lot of the compensation if profits fall. If you look at the graph carefully, you will note that CEO pay scales in greater proportion to PROFIT over time, rather than whatever it was keyed to before.

Measuring profit over dollars paid to CEOs as a measure of whether CEOs actually are worth what they get paid isn’t very useful. You’re leaving out capital intensity, company size, market growth, and a million other things.

Paper elaborating on how pliant corporate boards could lead to significant rent extraction by executives:

Look at that chart: The monster greed started with Reagan, basically!

actually, if you read more carefully, it started during Clintons watchful eye.

The huge uptick started during Clinton’s reign.

The little uptick during Reagan’s years is interesting, because it went away during the Bush 1 recession.

Perhaps it was the new accounting rules.

Me, I’m waiting for that HBO documentary on idle heirs of billionaires to rerun. Then I can really get irritated about ridiculously rich people and their benefit to society.

The most plausible explanation I’ve seen is the rise of “funny accounting.” Apparently if you compare the un-fakeable corporate earnings number that’s derived from national accounts with the stated corporate earnings numbers, a big gap opened up in the mid 1990s that has yet to close.

There was a change in the way that CEOs could be paid if I remember correctly, which led to massive inflationary schemes such as enron and worldcom.

Bottom Line: These fuckers are way overpaid. I bet not a single one of them can dunk, hit a major league homerun, or throw a pro touchdown pass!

First: What Desslock said. ;)

Second: The role of the CEO in a large company is vastly more complex in todays world economy. Working for a Really Big Company, I’ve seen the direct impact that a CEO has, both for the better and the worse. A CEO sets the strategic direction for a company, and in today’s world that can either sink a company or produce a much stronger company. While it is really out of date today, the book Built to Last gives some great examples of companies that were the absolute top in their class that have shriveled up and died due to CEO decisions, and companies that were in danger of shriveling up and dying whose CEOs remade the company. If you are the person making those decisions for a 50 Billion dollar per year company, what is the appropriate compensation? How much do shareholders of GE during the Welch years feel Welch was worth?

I agree that the options and deferred stock payments that are such a big piece of a CEO compensation are problematic, but I certainly understand the idea. Should you just give a CEO of a huge corporation $20 M regardless of how the company does, or do you give him/her options and deferred stock so that if the company tanks, he gets no money?