CEOs Get Paid Too Much, Says Everyone

GnaGnaMan

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In their recent research, scheduled to be published in a forthcoming issue of Perspectives on Psychological Science, Chulalongkorn University’s Sorapop Kiatpongsan and Harvard Business School’s Michael Norton investigate “what size gaps people desire” and whether those gaps are at all consistent among people from different countries and backgrounds.

It turns out that most people, regardless of nationality or set of beliefs, share similar sentiments about how much CEOs should be paid — and, for the most part, these estimates are markedly lower than the amounts company leaders actually earn.

[...]

For the countries combined, the ideal pay ratio for CEOs to unskilled workers was 4.6 to 1; the estimated ratio was about double, at 10 to 1. But there were some differences country to country. People in Denmark, for example, estimated the ratio to be 3.7 to 1, with an ideal ratio being 2 to 1. In South Korea, the estimated gap was much larger at 41.7 to 1. The ideal gap in Taiwan was particularly high, at 20 to 1.
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http://blogs.hbr.org/2014/09/ceos-get-paid-too-much-according-to-pretty-much-everyone-in-the-world/

Are your ideals in line with that? What about your estimates?

Should anything be done about CEO pay? Why? Why not?
 
For me the problem is that most everybody else gets paid too little.
 
Belz... said:
CEOs are paid by private companies. They should be paid whatever the company feels is adequate.
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No, they are paid by shareholders of publicly owned companies. Private companies have owners, not CEOs. Shareholders will keep giving the CEOs more money as long as they are convinced that he or she is generating more money for them. Whether the CEO is good at doing his job or is good for the long-term health of the company is usually irrelevant and has no bearing on what they are paid. Shareholders are usually short-sighted and want money NOW.
 
Psi Baba said:
No, they are paid by shareholders of publicly owned companies. Private companies have owners, not CEOs. Shareholders will keep giving the CEOs more money as long as they are convinced that he or she is generating more money for them. Whether the CEO is good at doing his job or is good for the long-term health of the company is usually irrelevant and has no bearing on what they are paid. Shareholders are usually short-sighted and want money NOW.
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I''m under the impression that shareholders have been largely powerless to prevent the huge payouts to CEOs. I've read of a number of cases in which they tried to.

I'm not quite sure how the mechanism by which these get awarded works in practice (and would like to know), but I'm pretty sure the preferences of shareholders are only theoretically a big factor.
 
Our economic system allows CEO's to get paid whatever those paying their salary feel they are worth. I think it would be very good PR for them, and set a good example, to accept a lower amount. It's not like one can't get by on $1M/year (for example) instead of $10M.
 
DavidJames said:
Our economic system allows CEO's to get paid whatever those paying their salary feel they are worth. I think it would be very good PR for them, and set a good example, to accept a lower amount. It's not like one can't get by on $1M/year (for example) instead of $10M.
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Avarice knows no limits. There are people with billions of dollars who will still screw their waitress out of a two dollar tip.
 
Belz... said:
So ? They are not public like government agencies. Their salaries are still determined by the company. Who makes the call; and don't the shareholders have a say in the decision ?
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The board of directors 'makes the call'. Said board being voted upon in some fashion by the shareholders. The rules for that vote are (surprise! surprise!) decided by the board of directors (with a few rules from the feds). So, once someone's on the board, it's very hard to get them off without help from other members of the board (or at least non-interference).

Such boards tend to be made up of prominent investors (ie rich people). CEO's tend to be prominent investors. So, you end up with boards of directors populated by the CEO's of other companies (fed rules frown upon the CEO himself being on the board). Now you have an 'old boys club' established. The people responsible for saving the company $$$ (limiting CEO salaries) are negotiating their own salaries with the same group of people.

Then you have the 'distorted perspective' feedback. The CEO's sitting on the board of directors are all rich themselves. When looking at an external event, we judge it against our own experiences. How many professional sports players have you seen complaining "It's not fair: How can I be expected to live on only $2 million a year!"? When deciding what a CEO's salary should be, they compare it to their own.

They can pretend to justify those salaries with nebulous terms because CEO contribution to profit is not easily measurable. Normal workers have a defined work output. Even when simply part of a larger group, a worker's contribution is usually easily measured or estimated. But CEO's often don't produce anything tangible. The larger the corp, the less tangible a CEO's contribution is.

So, you have a salary for an unmeasurable, often ill-defined, job being decided by people with a distorted view of money who are beholden to the person being paid for their own salaries. I can't see how that could possibly go wrong.
 
GodMark2 said:
The board of directors 'makes the call'. Said board being voted upon in some fashion by the shareholders. The rules for that vote are (surprise! surprise!) decided by the board of directors (with a few rules from the feds). So, once someone's on the board, it's very hard to get them off without help from other members of the board (or at least non-interference)..
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Well, I guess that's what you get for buying shares but not any sort of control over a company. Aside from profits yourself, it seems you have no expectation of controlling the CEO's salary. So where's the outrage ? Sell your shares in protest.

Anyway, thanks for the explanation. I don't know much about that market.
 
GodMark2 said:
Then you have the 'distorted perspective' feedback. The CEO's sitting on the board of directors are all rich themselves... How many professional sports players have you seen complaining "It's not fair: How can I be expected to live on only $2 million a year!"?
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GodMark2 said:
They can pretend to justify those salaries with nebulous terms because CEO contribution to profit is not easily measurable. Normal workers have a defined work output.
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Athletes and actors and directors and singers are often mentioned along with corporate executives as having outlandish incomes, but the second quote here makes them different. Audiences pay to have entertainers entertain them and buy related products after being entertained, and advertisers pay to put advertising where audiences will see it while watching to have entertainers entertain them, so there are direct sales numbers that people in the entertainment industry can point to and say "this is how much people out there paid for what this star does". A company that makes chairs can't point to their growth in chair sales last year and say "this is how much people out there paid for what this executive does".
 
Delvo said:
Athletes and actors and directors and singers are often mentioned along with corporate executives as having outlandish incomes, but the second quote here makes them different. Audiences pay to have entertainers entertain them and buy related products after being entertained, and advertisers pay to put advertising where audiences will see it while watching to have entertainers entertain them, so there are direct sales numbers that people in the entertainment industry can point to and say "this is how much people out there paid for what this star does". A company that makes chairs can't point to their growth in chair sales last year and say "this is how much people out there paid for what this executive does".
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For the record: I wasn't claiming entertainers paid primarily from event ticket or merchandizing sales were an example of 'overpaid'. Simply that they have no idea what a month's worth of groceries cost the average person.
 
I think to a great extent people here are talking about public companies. This is where you may have a legit complaint that the shareholders aren't being represented adequately by the board.

Private companies are a different matter and the compensation of CEO's is a lot more directly tied to the owners. Note that these CEO's also generally get paid very well.

Why? Being a CEO is an amazingly difficult job that not many people can do well. You guys see rich fat cats but my experience is people that literally dedicate their lives to their jobs. I've never met a CEO who wasn't a workaholic type because that's what it takes.

In addition the level of responsibility you have is bordering on insanity if you have a lot of employees. Balancing the interests of the customers, employees and shareholders is a thankless task that not many people can accomplish. It's certainly not a job anyone can do.
 
To me, the beef isn't always how much the top management (not only CEO) makes itself, but whether the production workers who actually produce the wealth of the company are earning a decent living by reasonable standards.

If everyone in a prosperous company is earning enough to enjoy a decent quality of life, people won't be so inclined to resent however much the top brass are taking home. Bully for them, we appreciate our good jobs.

It's when lots of people work very hard for the company but struggle to maintain a house and raise a family even with both parents working fulltime that I feel CEO pay becomes worthy of questioning, not only by employees but by each society at large.

Look at a graph of US worker productivity and worker pay from at least 1950 to present some time. What happens around 1980 is important when considering this topic.
 
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Lorentz said:
I''m under the impression that shareholders have been largely powerless to prevent the huge payouts to CEOs. I've read of a number of cases in which they tried to.

I'm not quite sure how the mechanism by which these get awarded works in practice (and would like to know), but I'm pretty sure the preferences of shareholders are only theoretically a big factor.
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What has happened in America, and probably much of the rest of the world but I'm only familiar with America, is that shareholders have become stupid.

Once upon a time, stockholders were mostly business savvy professionals who studied companies and provided money to the ones that seemed like they were well run and would turn a profit, which would be returned to shareholders in the form of dividends. Of course, you could forego a future dividend income and just take an immediate gain by selling your stock at any time, and the business savvy people who owned stock would make that decision based on all sorts of very businessy factors.

Then along came the mutual fund. Having observed that stocks tended to make money on average, someone found a way to sell some sort of average stock. It was great. You could buy what the pros bought, and they usually made money, so you should, too. What could go wrong?

Well, what could go wrong is that people didn't realize why the stock market had been such a good investment. it was because it was, on average, tracking investments made by smart investors. As the mutual fund gained in popularity, that money became increasingly less intelligent. The investors were just blindly giving money to a fund manager. On the other hand, at least that fund manager was a business savvy sort of dude, so that helped.

Then came the growth of the 401(k) plan. Suddenly, everyone could get in on the game, and millions of people were blindly shoveling billions of dollars toward some very rich men, with absolutely no knowledge of where it was even going. All that mattered was that the statements showed increase in the share price, which was what mattered to those oh-so-savvy investors in cubicles and assembly lines across the land. Business, shmizness. Did my balance go up last month?

And what has that got to do with CEO pay? Well, the business savvy investors in days of yore knew that if you threw tons of money at a guy and gave him incredible control over how to spend it, he would find a way to spend it on himself, unless of course you watched him like a hawk. So, the shareholders hired a few hawks, called Boards of Directors, to make sure the CEO didn't steal or squander all the money. As the mutual funds and 401(k) "investors" became a much bigger share of the pie, CEOs figured out that no one was really watching over their shoulders. More and more of them became very influential over the BoDs, and they hired compensation committees to ensure who would set CEO salaries, and those same committees would determine a fair level of compensation for board members, who labored tirelessly at as many as three meetings per year. Surely that's worth a large sum of money, isn't it? Any objections? Raise your hands? Great.

Summary: The "little guys", like you and me, became a much bigger part of the investor class, but we really don't like to pay attention to what people do with our money. We just blindly keep shoveling in the hopes it turns out well. Knowing that no one is really watching, they take as much money as they can get away with taking.

Or, in other words, we have met the enemy, and they are us.


ETA: And what do I think we, as in the government who represent us, ought to do about it? In my opinion, nothing. Everything being done is being done right under your very noses, perfectly legally. As long as we have a progressive tax system, they will at least help fund the infrastructure necessary for the megacorporations to exist.
 
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Meadmaker said:
ETA: And what do I think we, as in the government who represent us, ought to do about it? In my opinion, nothing. Everything being done is being done right under your very noses, perfectly legally. As long as we have a progressive tax system, they will at least help fund the infrastructure necessary for the megacorporations to exist.
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I won't argue with the rest of your post but this part needs comment. Just because something is legal does not mean it is right or fair. I think there are LOTS of things that could be done to balance the corporate playing field.

Second, we don't have a progressive tax system for the very rich. So to think they are funding the infrastructure is to be blind to the facts.
 
Who Dares!?

Question the Unseen Hand of the Market ?!?

pinko commie tree-huggin' Libruls THATs who!
 
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