Many people think that CEOs of public companies are systematically overpaid. David F. Larcker and Brian Tayan, both of the Stanford University Graduate School of Business, disagree. In a paper recently posted on the Social Science Research Network, they argue as follows:
While it is true that certain individual executives in the U.S. receive compensation that is unmerited based on the size and performance of their company, the compensation awarded to the average CEO is much more modest than [some critics of CEO pay] suggest. Based on data from the 4,000 largest publicly traded companies, the average (median) CEO received total compensation of $1.6 million in fiscal year 2008. This figure includes salary, bonus, the fair value of equity-related grants, and other benefits and income. This does not seem like an unconscionable level of compensation for an around-the-clock job with tremendous responsibility.
Larcker and Tayan don’t mention it, but I would add that, although $1.6 million a year is a huge figure relative to what most people make, it is nevertheless a good deal less than what many sports stars, singers, and actors make, and even a good deal less than what many elite investment bankers and lawyers make. That is to say, it is good deal less than the income of many other people who are not the subject of public opprobrium because of their level of compensation.
Larcker and Tayan’s paper is derived from their new book, Corporate Governance Matters, which promises to be a good read.
July 18th, 2011 | 10:27 am
As long as I am free to take my business elsewhere, I could care less what anyone makes at any company. It has nothing to do with me at all.
The standard refrain the last few years in response has been “But but but they took taxpayer money, so it IS our business!”
To which my response is that said government intervention never should have happened in the first place and that having made a whole bunch of serious mistakes, the government should just STOP rather than keep accelerating onward with awful interventionist policies in corporate governance.
July 18th, 2011 | 10:40 am
I think the big money paid to movie stars or sports stars is different from the big money paid to CEOs. A movie star who is a big box-office draw can make a movie a hit that it might otherwise not be. A major sports star may make the difference between a winning and a losing team, and that in turn may determine whether fans show up and pay for tickets.
What seems objectionable about some CEOs is that they are highly paid whether their companies succeed or fail, and they sometimes have arrangements (golden parachutes) that make them very rich if they fail miserably and have to quit.
July 18th, 2011 | 10:54 am
I was waiting for someone to make David Nickol’s point–that the problem isn’t that CEOs make too much money but that there is little connection between how much they make and how well their companies fare, that they are not “paid to perform.”
But Lacrker and Tayan have data to refute this claim as well. They write, “While there are examples of unreasonable compensation, it is not true that the typical CEO is not paid to perform. On average, CEOs hold a personal equity stake in the companies they manage with a median value of $4.6 million…. A one percent change in the company’s share price translates into a roughly $54,000 change in the underlying value of these holdings. If the CEO doubles the stock price, he or she stands to realize $5.2 million in appreciated value. These are significant sums of money that provide incentive to create, and not destroy, shareholder wealth over the long term.”
July 18th, 2011 | 11:01 am
David: Other than envy and greed, what concern is that of yours?
July 18th, 2011 | 11:15 am
Brian,
That’s been my thought too when I see the large paychecks of CEOs (or athletes, movie stars, etc.).
If someone else makes money honestly, good for them. If they make it dishonestly, well then hopefully justice will be served and anyone they have harmed can be compensated in some way for their losses.
Beyond that, it really isn’t my concern.
July 18th, 2011 | 11:28 am
“While there are examples of unreasonable compensation, it is not true that the typical CEO is not paid to perform.”
Robert T. Miller,
I have no problem accepting that the typical CEO is not overpaid. I think the complaints about CEOs are about the ones who receive “unreasonable compensation” and particularly “golden parachutes.” I work for a large corporation the CEO of which is generously compensated, but she is doing a fine job, and I don’t think anyone in the company begrudges her the money.
Brian,
Fairness. Justice.
July 18th, 2011 | 11:51 am
David: You can tell yourself that your envy is really a concern for “fairness” but it’s still just envy.
July 18th, 2011 | 12:30 pm
I’m with David Nickol. What has maddened many Americans is the sense that massive compensation has been received by a significant number of CEOs even when their leadership drove companies and our economy off a cliff.
In the article Robert T. Miller linked to Friday by Joseph Stieglitz, Stieglitz points to the chicanery of speaking of “retention bonuses” rather of “performance bonuses” as a way of justifying bonuses when performance hasn’t merited it.
It further maddens Americans (at least it maddens me, an American) that this largesse now, according to the highest court of the land, translates into considerable political clout that can be used to protect it—for it has been ruled that money = speech, that corporations are persons possessed of free speech rights, and that such money/speech by such “persons” must be given free reign in the political process. This is another version of the question that JB in CA pressed in Friday’s thread but that Robert T. Miller has yet to respond to.
Brian,
Where did you acquire the ability to see into people’s souls? Attributing vice to your interlocutors without argument suggests you don’t have an argument.
By dismissing criticism of unjustly acquired wealth as “envy,” you have created the perfect cover for the criminal accumulation of wealth, whether you intended to or not. Is it your view that all wealth has always been justly acquired and therefore all criticism of it is really about something else, i.e., envy? If it is, you need to rethink your view. If it is not, you need to explain the proper, non-envious way to criticize the unjust acquisition of wealth.
July 18th, 2011 | 12:54 pm
So, it’s okay if an athlete gets a huge paycheck, per his/her contract, when they leave, regardless of performance (aka a golden parachute), but it’s not okay when a CEO does it?
July 18th, 2011 | 1:22 pm
Charlie: “It’s not fair that he has more money than me!!!!”
That’s what envy is.
“you have created the perfect cover for the criminal accumulation of wealth…Is it your view that all wealth has always been justly acquire”
Nope. Never said anything even in the same universe as that. If a crime has been committed, prosecute it. If ethics and morals are being broken, we as a society should call them on it. But no crimes are alleged anywhere here–it is just asserted that company A gives person B lots of money, and that’s supposed to be inherently bad somehow. I see no reason not to attribute that to envy, pure and simple.
July 18th, 2011 | 1:27 pm
Brian 2: we’re talking about performance-related bonuses, not contracted salaries. Which athletes are being awarded large bonuses on top of large salaries when they have performed poorly?
July 18th, 2011 | 1:27 pm
Charlie: Do you even know what the infamous Supreme Court case you’re alluding to was even about? A company wanted to run ads for a movie saying “Don’t vote for Hillary Clinton!” and the government said they could not do so. You’ve got it completely backwards about which part of that whole situation you should find maddening.
July 18th, 2011 | 1:33 pm
Brian,
I’ve made choices that I’m quite happy with that have reduced the likelihood that I’ll ever be wealthy. In truth, in global terms, I am quite wealthy, but 10 years of graduate education in theology is not the road to the kind of wealth we’re talking about, which is more than fine with me. I’m grateful for having been allowed to do something I consider meaningful, and to have the means to support my children. I do not want the lifestyle, nor the temptations that come from a lifestyle, of great wealth.
Perhaps you didn’t intend to do so, but putting words in my mouth is offensive. Please refrain from doing so in the future.
July 18th, 2011 | 1:46 pm
Brian, I’m so glad we have you here to be our Father Confessor and expose all of the hidden vices in our souls! Without your penetrating insight, I wouldn’t have realized that I was feeling envy, rather than whatever it was that James was feeling when he wrote chapter 5 of his epistle.
It’s also encouraging to know that so long as no laws were broken, we can be certain that nothing unjust has occurred. How perfectly the laws and government of These United States conform to the commandments of the Lord! Truly this is a holy country, when we can be certain that it is impossible to commit any evil action without also violating the law.
July 18th, 2011 | 1:48 pm
Charlie: I honestly have no idea at all what you’re even talking about in the last paragraph of your 1:33pm post. You appear to have grossly misconstrued something or other.
July 18th, 2011 | 1:56 pm
David: You can tell yourself that your envy is really a concern for “fairness” but it’s still just envy.
Brian,
I suppose it’s possible that I am fooling myself, but you have absolutely no way of knowing whether I am or not, so what makes you so insistent?
July 18th, 2011 | 2:14 pm
David: You’re the one who said “fairness” is why this is your concern.
“It’s not fair that he has more money than me!!!!”
That’s what envy is.
If you want to add “envy” to the list of words to be redefined from their commonly understood meanings, let me know.
July 18th, 2011 | 2:50 pm
“On average, CEOs hold a personal equity stake in the companies they manage with a median value of $4.6 million…. A one percent change in the company’s share price translates into a roughly $54,000 change in the underlying value of these holdings. If the CEO doubles the stock price, he or she stands to realize $5.2 million in appreciated value. These are significant sums of money that provide incentive to create, and not destroy, shareholder wealth over the long term.”
What happens is that CEO stock options are commonly re-priced so that the CEO effectively cannot lose.
The fact that the paper authors are ignoring widely-known agency problems is disturbing. Unless the stock options are extremely carefully designed, the use of options alone will not necessarily align executive interests with the interests of the shareholders.
For example:
The connection between executive performance and short-term stock price is an extremely vague relationship. How much is due to a rising stock market, previous executive’s work, favorable industry conditions, luck and so on? And this relationship often motivates behavior to boost the share price in the short term (so the executive can exercise his options and collect the profit), while ignoring company health (and sometime ignoring the law entirely) in the long term.
July 18th, 2011 | 3:09 pm
David: You’re the one who said “fairness” is why this is your concern.
“It’s not fair that he has more money than me!!!!”
That’s what envy is.
Brian,
You are making an unwarranted assumption. As I said, I work for a large corporation. The compensation of our CEO last year was £2.7 million, including £969,000 base salary and £1.6 million in short-term bonus. She was also awarded 400,000 long-term shares at 962p worth £3.8 million, plus a £620,000 cash pension contribution.” That is way more than I make, and I have no sense of unfairness. She does an excellent job. It does not bother me that someone makes more money than I do. It bothers me that some people receive “unreasonable compensation” when they do a poor job, and get millions more when they are forced to resign. How much money I personally have is irrelevant.
I feel that in a recent trial, justice was probably not done, and someone got away with murder. Is my sense of unfairness and injustice based on the fact that I envy people who get away with murder when I can’t? My sense of fairness and justice is, I would like to believe, not all about personal envy.
July 18th, 2011 | 3:09 pm
Brian,
If we misapply resources, then we will achieve comparatively poor results. We know that American executives are paid considerably more than almost all other comparable economies. It is not simply a problem between a company’s board and the company’s executives. The American economy is devoting, across the board, substantially more resources to paying executives than other comparable economies. This seems to be a systematic problem.
It is possible, for example, that American corporate law has been improperly designed: perhaps such that executives are over-privileged as against investors. It is the investors who, ultimately, are paying the executives. It seems possible that the executives have too much power versus the investors. In the United States, investors are actually nearly everybody, as the major investors are such entities as state employee pension plans, union pension plans, corporate pension plans, local government employee pension plans and so on.
Introducing envy into this discussion is counter-productive. Effectively, American executives could be overcompensated, and they’re getting that money from (in essence) all non-executive Americans. We need to see some form of argument from you that justifies this allocation of resources.
Further, mis-allocation of resources could prove harmful to the entire US economy as a whole. American companies have an inherently higher cost structure (as compared to global competitors) because American firms need a great deal of resources to allocate to executive pay. Does this, in turn, make the American economy as a whole, less competitive? That is certainly a possibility.
July 18th, 2011 | 3:32 pm
David: You appear to be using “justice” and “fairness” as if they are synonyms when they are in fact not at all, making it very difficult to really parse out what your actual position is. If you’ll drop the “fairness” part most of my objection will vanish as well as the charge of envy as your motivation (I see no point in arguing the “justice” of varying salaries for various jobs).
July 18th, 2011 | 5:42 pm
There is a reason golden parachutes exist.
They expedite the exit of a bad CEO. If a CEO is underperforming, it is ideal to remove him ASAP. “Golden parachutes” facilitate this, eliminating protracted, costly and ugly firings.
They allow bad companies to hire a good CEO for a turnaround project. To accept the CEO position at a mediocre or failing firm, a candidate PRUDENTLY seeks a backstop in case the firm fails. This compensates him for the risk his career could suffer.
July 19th, 2011 | 7:12 am
We will be much better off when we figure out a system that can enjoy the benefits of competition and capitalism without creating a world where the rich own the poor.
That the gap between owners of wealth and workers is so great is a sign that our society is ill.
That we now recognize men who do nothing – but who use their money wisely – as “working” more than men who actually produce, is a sign that our society is ill.
This is not me being communist, or even socialist: I recognize that competition is vital, and that letting men enjoy the fruits of their labors is a necessary component of providing the incentives needed to growth.
But we will be a better society when we can find ways of incentivizing (is that really a word now?) that don’t destroy the next generation’s ability to start from something resembling a meritocracy.
It is a sad, sick thing that right now people quite accurately perceive that what kindergarten your child gets into is a major factor in what social class he will end up as part of.
I hate the way both liberals and conservatives are “waging class war” even as both sides claim they’re not. We have a serious problem that needs solving, and neither attacking the rich – nor defending huge wage gaps – will help; what is called for is a real solution.
July 19th, 2011 | 8:04 am
I’m gonna go with Brian on this one.
The bottom line: detachment is the only sane response to the non-problem of alleged overpayment of corporate chieftains.
In the end, it makes little to no difference in my life what those guys haul down. By and large, they are not paying themselves, but are being paid by boards of directors, who are in general fairly independent and, speaking for the companies’ owners, are charged with getting the right people in high places to do very demanding jobs. Boards are, by and large, made up of smart and accomplished people who are qualified to make those judgments. Qualified though not infallible. But that’s about as good as we can do in an imperfect world. We certainly don’t want to entrust the government to make these decisions instead of the boards!
Detachment–because it makes so little difference to me what these guys make. But on second thought, it does. Their salaries are the logical consequence of a free market. The free market is the best engine of wealth creation we have. Mess with it (eg, by poor tax policy, taking over the health care or the auto industry, arbitrarily capping CEOs’ salaries, etc) and you interfere with wealth creation. Then, in general, everyone is poorer.
Thus, on second thought, the pay of these CEOs affects me after all. I am richer because they are because the (mostly) free market has made it so!
July 19th, 2011 | 10:18 am
Stephen, that’s a pretty good point. So the next question, I suppose, would be whether the specific terms of a golden parachute are a good investment in gaining that benefit. How golden does a parachute have to be in order to make those good things happen?
Joe, sure detachment is emotionally healthy, but it may not always be pragmatically prudent. What if I’m one of the owners of the company — which I’m likely to be if I own any retirement assets or other mutual funds? Isn’t it then rational of me to care whether I’m overpaying my CEO, or whether I might be able to get a better return by reducing his pay or going with somebody else cheaper?
And as for the free market: we don’t really have that here in America, not for large companies like the ones in the study.
In cases where CEO pay is excessively high, it is precisely because of a distortion in the market pricing mechanism, caused by an imbalance of power between CEOs and investors. Investors nominally appoint the board to look out for their interests and to check the power of the CEO. But CEOs often have the power to control the board themselves, and thus to game the system by controlling both sides of a supposedly balancing relationship.
So “excessive pay” by its definition is not a result of free market forces, but rather of the circumvention of those forces. So you see how it could be sensible and prudent to look at the statistics comparing CEO pay in the US to CEO pay in other countries and to wonder if maybe such a market failure is occurring in our economy.
And so, Brian, the desire to examine this could easily be motivated by any number of things other than “envy” — rational economic interest, mere curiosity, etc.
July 19th, 2011 | 10:28 am
Ethan: I wasn’t the one that said that David was motivated by the fairness/unfairness of the situation. He was. If he hadn’t said that, the charge of envy as motivation (which sure seems to have struck quite a chord with so many people, suggestively) would never have come up.
July 19th, 2011 | 12:05 pm
Brian, is there any situation in which one could be concerned about fairness without being envious? Or are you saying that any mention of fairness automatically means one is being envious? Is there such a thing as unfairness?
July 19th, 2011 | 12:51 pm
Ethan: As I’ve said above multiple time, thinking it is unfair that someone else makes lots of money seems to me to be the very definition of envy. Wikipedia seems to agree: “Envy (also called invidiousness) is best defined as an emotion that “occurs when a person lacks another’s (perceived) superior quality, achievement, or possession and either desires it or wishes that the other lacked it.”" Now, I’ve said nothing about covetousness anywhere, but it’s explicitly clear in this whole discussion that the “wishes that the other lacked it” part applies.
Unfairness could describe a situation where two people are rewarded radically differently for the same work, treated differently for doing the same action, etc., but that’s nothing like the situation we’re talking about here. Even if it were, I don’t see why one shouldn’t keep in mind the parable of the workers in the vineyard.
July 19th, 2011 | 3:44 pm
Joe,
The problem with asserting that America’s very high levels of executive pay is simply an output of an efficient market is that executives do not get recruited in anything approaching a free market. See Rakesh Khurana’s book, Searching for a Corporate Saviour, for the details.
Further, one of my points is that government structures how corporations are run. That is, the legal framework for a corporation is created by government – how the corporate board is run, for just one example. This is not something that the market does itself. There are substantial differences in how corporate boards are structured even between relatively similar economies. There is not much reason to believe that American corporate law is a priori somehow better than that of other countries.
There are many similar market-structuring activities done by government or nonprofits or associations, some of which initially seem unrelated to the macro economy. One instance from economic history is: higher education in England was, until the 1840s, limited to precisely two universities that held a legal monopoly on higher education. But, in addition, these two institutions were not directly under government control, but independent non-profits.
Thus, the entire English educational structure quickly became inadequate during the Second Industrial Revolution, which required large numbers of personnel educated in engineering, management, accounting, marketing and science. And the English state, because it had such limited capacities and experience in organizing and funding public higher education, took many decades – something between 40 and 80 years – to develop the sort of universities needed. (The two previously existing universities essentially refused to make the needed transition ever.)
Because the US and Germany readily had the capability and experience of creating public higher education, this factor greatly aiding them in exploiting the Second Industrial Revolution, while the UK generally was not able to exploit the new opportunities as easily.
July 19th, 2011 | 3:59 pm
Brian,
You have not given us any account of why executive pay in the US should be higher than comparable economies. Executive pay (in a public corporation) is money that could be returned to investors. Of course, some level of higher pay is needed to encourage people to take executive positions and perform well in them. This is not very disputable.
But, the question is what that level of pay should be. Yes, it should be higher than non-executive pay. But how much higher?
Let’s imagine that American corporate law (probably unwittingly) has structured corporations such that executives have much more power than investors or other stakeholders. Thus, executives, quite naturally, use that greater power to take cash-flows that could go to investors (or an infinite number of other places).
This is a question of fairness and it has nothing to do with envy. The question simply isn’t whether executives should be paid more than other employees, but rather how MUCH more should they be paid. This is not an amount set in stone – it’s varied greatly across history and across geographies.
July 20th, 2011 | 10:48 pm
I work for a Fortune 500 company in which the median wage is $35,000.00 a year. The CEO meanwhile made $12.8 million last year, in a year in which all employee salary increases were limited to 1 1/2% due to the company’s limited growth under the bad economy.
Sorry, folks, but that’s obscene. For those who think criticism of such obscenity is due to envy or greed, I suggest you look to St. Basil, who said that if you have two coats you’re robbing the poor, or St. Jerome, who said that wherever their is opulence there is always theft somewhere behind it.
To put it bluntly, corporate capitalism is corrupt, and represents “the emancipation of avarice”: http://www.firstthings.com/article/2011/05/the-emancipation-of-avarice
If there’s one thing we don’t need it’s Robb Report Christianity.
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