CEOs Get Paid Too Much, Says Everyone

[a_unique_person]

When a bridge fails, the structural engineers will be prosecuted for their negligence. When a company fails, no one is prosecuted.
That either is a horrible injustice, or a lesson on the scientific status of economics.

What seems to happen is that the CEO gets a very big bonus to walk.

 

[GnaGnaMan]

I'm not sure the latter follows. A company may also fail due to a lack of demand, and lack of demand can be a result of changing technologies. When refrigerators became popular, the companies that ran ice houses went out of business. That is no negligence in my book. And you can't simply say that the companies running ice houses should have changed to manufacturing refrigerators, as that's a totally different ball game with another skill set required than for storing and distributing blocks of ice.

"Scientific status of economics" is probably not the right phrase. You point out that success and failure is often dependent on external factors. (Although I would not call abandoning an unprofitable market a failure. Bankruptcy is, though)
That implies that skill and work of executives is largely irrelevant. That isn't too say that anyone could do it, just that there shouldn't be any shortage of suitable candidates.

The point is: If success is heavily dependent on external factors, then there is no moral justification for high pay. If it truly does depend on executives then there should be consequences for failure.

It's also quite interesting to compare CEO salaries to those of scientists who are responsible for such technological advances.

Here's from the WP entry of one of this year's physics Nobel laureates:

In 2001, Nakamura sued his former employer Nichia over his bonus for the discovery, which was originally ¥20,000 (≈US$180). Although Nakamura originally won an appeal for ¥20 billion (≈US$180 million), Nichia appealed the award and the parties settled in 2005 for ¥840 million (≈US$9 million), at the time the largest bonus ever paid by a Japanese company

For comparison the OP article puts CEO compensation in Japan at $2.4 M (and in the US at $12.3 M).

 

[Meadmaker]

It's telling that no one tried to argue that CEOs care about employees.
We all know that the incentive is to cut costs: Lower wages, fewer benefits, even neglecting safety.
That incentive is even stronger for shareholders, who reap the profits, than for CEOs who get lavishly paid even when they fail.
That means there is a powerful elite that's interested in making life worse for the vast majority of people. That seems like a flaw in the system.

In my opinion, the problem isn't necessarily a "powerful elite". As noted previously, the outrageous salaries of CEO's have been getting worse as more and more ordinary people own stock. The reason isn't all that hard to fathom. In the theory on which the stock market is based, a shareholder is an investor who makes money if and only if the company makes money. A traditional shareholder would not be concerned about a company he invested in having one bad quarter, nor even in slumping stock price. As long as the company's long term health seems good, the dividend won't be cut, and still has the prospect to grow.

However, a mutual fund manager knows that his clients only care about the value of the fund's shares, and those shares' value fluctuates on a day to day basis based solely on the stock price. If the stock slides, the business savvy person might see a buying opportunity, but the mutual fund holder, i.e. the vast majority of us who buy through our retirement funds, see a declining balance on our account statement, and might decide to go to a "better" mutual fund. Therefore, the fund manager has a very powerful incentive to put pressure on the company for short term measures which keep the share price high today. That incentive is not because he represents a "powerful elite". It's because he represents thousands of ordinary people who really have no clue about the actual businesses of which they are part owner.

 

[PhantomWolf]

When a bridge fails, the structural engineers will be prosecuted for their negligence. When a company fails, no one is prosecuted.
That either is a horrible injustice, or a lesson on the scientific status of economics.

Actually, if a company fails leaving debts, and it is determined that the Directors run it in a manner that caused it to fail, especially if they hid stuff from the shareholders and creditor, they can and are prosecuted, as a quite a number of those who directed financial companies over here have learned to their distress, not an insignificant number of them ending up with jail sentences.

 

[The Norseman]

It's telling that no one tried to argue that CEOs care about employees.
We all know that the incentive is to cut costs: Lower wages, fewer benefits, even neglecting safety.
That incentive is even stronger for shareholders, who reap the profits, than for CEOs who get lavishly paid even when they fail.
That means there is a powerful elite that's interested in making life worse for the vast majority of people. That seems like a flaw in the system.

When a bridge fails, the structural engineers will be prosecuted for their negligence. When a company fails, no one is prosecuted.
That either is a horrible injustice, or a lesson on the scientific status of economics.

I just want to respond to these posts with a "well said!"

 

[The Norseman]

In my opinion, the problem isn't necessarily a "powerful elite". As noted previously, the outrageous salaries of CEO's have been getting worse as more and more ordinary people own stock. The reason isn't all that hard to fathom. In the theory on which the stock market is based, a shareholder is an investor who makes money if and only if the company makes money. A traditional shareholder would not be concerned about a company he invested in having one bad quarter, nor even in slumping stock price. As long as the company's long term health seems good, the dividend won't be cut, and still has the prospect to grow.

However, a mutual fund manager knows that his clients only care about the value of the fund's shares, and those shares' value fluctuates on a day to day basis based solely on the stock price. If the stock slides, the business savvy person might see a buying opportunity, but the mutual fund holder, i.e. the vast majority of us who buy through our retirement funds, see a declining balance on our account statement, and might decide to go to a "better" mutual fund. Therefore, the fund manager has a very powerful incentive to put pressure on the company for short term measures which keep the share price high today. That incentive is not because he represents a "powerful elite". It's because he represents thousands of ordinary people who really have no clue about the actual businesses of which they are part owner.

See my highlight. Do these theories actually fit reality though? I don't know much about finance, hence my question. I am leery however of most of what is said on TV and so on regarding finance because it comes across to me as nothing but smoke and mirrors.

 

[GnaGnaMan]

In my opinion, the problem isn't necessarily a "powerful elite". As noted previously, the outrageous salaries of CEO's have been getting worse as more and more ordinary people own stock.

The majority of shares is concentrated in held by only a small part of the population. I don't know the role of funds in that.
In any case, I'd agree that CEO pay is primarily a corporate governance issue (even if I don't know if your theory holds water). I was making a general point there.

 

[GnaGnaMan]

Actually, if a company fails leaving debts, and it is determined that the Directors run it in a manner that caused it to fail, especially if they hid stuff from the shareholders and creditor, they can and are prosecuted, as a quite a number of those who directed financial companies over here have learned to their distress, not an insignificant number of them ending up with jail sentences.

Those are cases where the CEO actively lies. Those are basically fraud cases not comparable to negligence cases where engineers don't act according to standards.
It seems unthinkable that engineers could destroy values in the billions or even just millions without becoming criminally culpable. Among executives (or in finance) similar destruction seems to be just business as usual.

 

[3point14]

The downside to that is that it gives a perverse incentive for CEOs to take measures which yield short-term profit but that in the long term ruin the company. Profit five years down the line, or so, would be a better option, IMHO. Or stock options that can only be exercised after five years or more, or some such.

Tie it in to the pension.

 

[3point14]

I'm not sure the latter follows. A company may also fail due to a lack of demand, and lack of demand can be a result of changing technologies. When refrigerators became popular, the companies that ran ice houses went out of business. That is no negligence in my book. And you can't simply say that the companies running ice houses should have changed to manufacturing refrigerators, as that's a totally different ball game with another skill set required than for storing and distributing blocks of ice.

So, if the company fails it can't be said for certain that it's anyone's fault but if it succeeds then the bloke in charge diddit and gets a wedge precisely because he's highly influential and at the hub of all these important decisions that cannot be show to be causally linked to the end result.

I like that deal.

 

[arthwollipot]

I suspect that many CEOs are free-market libertarians. Because when the free market runs wild, it produces obsane salaries for people who direct it. Who wouldn't love a system that gives them truly ludicrous amounts of money?

 

[LSSBB]

Some academic research on the subject. The reasons are clear as mud, according to these folks. Good launching point for further research though.

web.mit.edu/frydman/www/COMP SURVEY 08-02-10.pdf

 

[luchog]

I suspect that many CEOs are free-market libertarians. Because when the free market runs wild, it produces obsane salaries for people who direct it. Who wouldn't love a system that gives them truly ludicrous amounts of money?

Not sure where you get the libertarian thing, particularly since megacorporations are predominantly an artifact of government interference in the market, and favourable legislation (ie. "corporate welfare").

Regardless, the political standings of the richest 10% of the population varies a bit, but overall tends to be strongly conservative. Limousine liberals like Ted Turner aside. If anything, their political position could be described as "Oligarchical"; a pretty long way from libertarian.

 

[Meadmaker]

See my highlight. Do these theories actually fit reality though? I don't know much about finance, hence my question. I am leery however of most of what is said on TV and so on regarding finance because it comes across to me as nothing but smoke and mirrors.

Anecdote: For many years, I avoided stock trading because it made no sense to me. I would read books with titles like "How to Buy Stocks", and what I read seemed absurd. Then I finally picked up a book on corporate finance. Suddenly, the stock market made sense to me........sort of. I now understood the theory of the stock market and how stocks ought to work. Unfortunately, I could also watch the daily headlines and stock market activity, and realize that the actual practice of day to day stock activity was seriously out of whack with the theory.

I did start buying stocks, though, and moved my 401k into a self managed IRA. I figured I at least understood when things were out of whack, and that ought to help. I haven't gotten rich, but I've beaten the S&P 500 for going on 18 years now, which means I am doing better than approximately 90% of mutual fund managers.

 

[TragicMonkey]

Anecdote: For many years, I avoided stock trading because it made no sense to me. I would read books with titles like "How to Buy Stocks", and what I read seemed absurd. Then I finally picked up a book on corporate finance. Suddenly, the stock market made sense to me........sort of. I now understood the theory of the stock market and how stocks ought to work. Unfortunately, I could also watch the daily headlines and stock market activity, and realize that the actual practice of day to day stock activity was seriously out of whack with the theory.

I did start buying stocks, though, and moved my 401k into a self managed IRA. I figured I at least understood when things were out of whack, and that ought to help. I haven't gotten rich, but I've beaten the S&P 500 for going on 18 years now, which means I am doing better than approximately 90% of mutual fund managers.

Have you read about the studies where they threw darts, or had a cat or a monkey select stocks? In each case they beat the mutual fund managers. (Although it is always a bad idea to give darts to a monkey, no matter how well it does on the stock market.)

 

[Meadmaker]

Have you read about the studies where they threw darts, or had a cat or a monkey select stocks? In each case they beat the mutual fund managers. (Although it is always a bad idea to give darts to a monkey, no matter how well it does on the stock market.)

Yep. Depending on how the study is conducted, you can make the fund managers look very, very, bad indeed.

The thing is, if the fund managers were very good at stock picking, they would still sometimes lose to the monkey, but most of the time an average fund manager will beat the monkey. However, he won't beat it by much. He'll beat it consistently by one or two percent The thing is, if you give him your money to invest, he will keep three percent of your money. You do the math. Monkey chow is cheaper.

Something like that happens with CEOs too. I worked for a company that hired a "celebrity CEO". The company was Hughes Aircraft and the CEO was C. Michael Armstrong. This guy was good. How do we know? Because he had done fantastic things while he was at some other company. (Lucent, I think.) Yet, somehow, when he was getting a zillion dollars per year to run our company, we nearly collapsed, and ultimately ended up being purchased by Raytheon. (And in this case, I can even point to specific very bad decisions he made that caused the collapse.) C. Mike ended up going to AT&T, which also did very, very, badly under his guidance.

The fact is that he had gotten lucky at Lucent. I'm sure he was a fine manager and all that, but he wasn't a superstar. I'm of the opinion that there really are no general purpose superstar CEOs. I don't think the ability to run one company well necessarily translates to running some other company. I'm also of the opinion that one guy at the top has limited powers to make a company perform well. If he is surrounded by idiots, the company won't do well. If he is surrounded by geniuses, he probably won't be able to ruin the company. However, if everything comes together just right, he can look like he's a genius, and get hired by some other company who thinks that the superstar can save them from whatever bad situation they are in.

 

[The Central Scrutinizer]

Have you read about the studies where they threw darts, or had a cat or a monkey select stocks? In each case they beat the mutual fund managers. (Although it is always a bad idea to give darts to a monkey, no matter how well it does on the stock market.)

Those "studies" are invalid. They usually check back on the prices within a few days or weeks. Usually, you can't really know if an investment has been successful until years have passed.

 

[LSSBB]

Yep. Depending on how the study is conducted, you can make the fund managers look very, very, bad indeed.

The thing is, if the fund managers were very good at stock picking, they would still sometimes lose to the monkey, but most of the time an average fund manager will beat the monkey. However, he won't beat it by much. He'll beat it consistently by one or two percent The thing is, if you give him your money to invest, he will keep three percent of your money. You do the math. Monkey chow is cheaper.

Something like that happens with CEOs too. I worked for a company that hired a "celebrity CEO". The company was Hughes Aircraft and the CEO was C. Michael Armstrong. This guy was good. How do we know? Because he had done fantastic things while he was at some other company. (Lucent, I think.) Yet, somehow, when he was getting a zillion dollars per year to run our company, we nearly collapsed, and ultimately ended up being purchased by Raytheon. (And in this case, I can even point to specific very bad decisions he made that caused the collapse.) C. Mike ended up going to AT&T, which also did very, very, badly under his guidance.

The fact is that he had gotten lucky at Lucent. I'm sure he was a fine manager and all that, but he wasn't a superstar. I'm of the opinion that there really are no general purpose superstar CEOs. I don't think the ability to run one company well necessarily translates to running some other company. I'm also of the opinion that one guy at the top has limited powers to make a company perform well. If he is surrounded by idiots, the company won't do well. If he is surrounded by geniuses, he probably won't be able to ruin the company. However, if everything comes together just right, he can look like he's a genius, and get hired by some other company who thinks that the superstar can save them from whatever bad situation they are in.

Kahneman covers this phenomenon very well under "The illusion of skill" in "Thinking Fast and Slow". Here is an article:

http://blogs.cfainstitute.org/inves...sers-arent-immune-from-the-illusion-of-skill/

Humans being what they are, they tend to be in denial of the illusion and discount the statistical evidence.

 

[TragicMonkey]

Those "studies" are invalid. They usually check back on the prices within a few days or weeks. Usually, you can't really know if an investment has been successful until years have passed.

In which case you could claim any investment is never a failure, as long as the company still exists, because it might suddenly turn around and make huge gains in the year 2870.

 

[Howie Felterbush]

Those "studies" are invalid. They usually check back on the prices within a few days or weeks. Usually, you can't really know if an investment has been successful until years have passed.

In which case you could claim any investment is never a failure, as long as the company still exists, because it might suddenly turn around and make huge gains in the year 2870.

If you're giving a bunch of money to a mutual fund manager and then cashing in a few weeks later you're doing something wrong.

The best investment for that short of a time frame is usually South American crop futures (i.e. dope).