The Foundation for Economic Education struggles mightily to explain why CEO salaries as as high as they are:
A CEO’s pay is a function of the executive’s relationship to the company and its shareholders. Shareholders provide capital to the corporation with the hope of a return on their investment. The CEO helps generate investment returns by growing the value of the company and its shares. Thoughtfully structured executive compensation is based on a combination of expected value creation along with measurable performance and shareholder value growth. When executives perform well for the owners of a company, it makes sense that they are compensated for their performance.
but I think that, ultimately, they fail. CEO compensation has risen much, much faster than corporate earnings, GDP, median wages, or the S&P 500. The discrepancy between the S&P 500 and CEO compensation is even more pronounced when you recognize that 30% of the S&P 500 is just five stocks and, well, most CEOs are not Jeff Bezos, Mark Zuckerberg, or Satya Nadella.
I don’t think that present CEO compensation can be justified economically. You’ve got to look at political and social factors. They are as high as they are because their boards of directors award them those compensations. Who sits on their corporate boards of directors? Other CEOs.
On each others boards, padding each others pockets, using agencies like top tier athletes https://www.sheffieldbarry.com/2017/09/top-10-executive-compensation-consulting-firms-1/
And, like top drawing actors getting paid millions for small roles in films. people in business know their name.
If I call a business leader, won’t go through. But everybody takes Warren Buffet’s calls.
CEO’s are not paid on a cost plus basis. They are paid are paid what the market will bear.
If you don’t like sports stars salaries, don’t go to games or watch them. If you don’t like Hollywood stars salaries, don’t watch their shows or their movies. I don’t. Patrick Kane is worth more to the Blackhawks than some also ran 500 pitcher for the Pittsburgh Pirates, but he makes less. Because the hockey market isn’t as robust as the baseball market.
If you don’t like CEO’s salaries don’t buy their products, their stock, or mount a proxy fight. Institutional investors carry more weight than people think. If you don’t like Jamie Diamond’s salary, don’t be a patron of Chase. But that issue is between the shareholders and the board. Institutional investors know what to do if they are unhappy.
There is empirical evidence that sports stars are worth what they’re being paid. Evidence that big company CEOs are worth their compensation is something between scanty to nonexistent.
I don’t watch professional sports, rarely go to the movies, and have never directly bought a stock in my life. Consolidation makes it very difficult or impossible to avoid purchasing big companies’ products but I avoid doing business with big companies to the degree that I can.
IMO corrupt corporate governance is a better explanation than “they’re worth it”.
Let’s take a single example: Mary Barra. Mark Fields’s total compensation in 2014 was around $18 million. Mary Barra’s total compensation today is around $22 million, i.e. about 20% more. GM’s stock is worth almost precisely what it was in 2014. How is she worth 20% more? In addition the current GM strike is closing in on being among the lengthiest in GM history and one of the keys issues is labor’s distrust of management.
Just for the record she’s not alone. IMO GM management has been incompetent for decades. It doesn’t take skill or acumen to drive your company into the ground. That’s doesn’t stop their CEOs from bringing in the big bucks.
“They are paid are paid what the market will bear.”
Yes, but the market consists of other CEOs sitting on each other’s boards.
Steve
This is drifting into the “inequality thing” Guarneri is right, but IMHO, doesn’t go far enough. Most Americans are apparently comfortable complaining about being poor, but throw what money they have away in an in-congruent manner. As I have said before, if you are poor, act like it. “Poor” Americans have hundreds of dollars slipping through their fingers every week. I could make a long list of what the “poor” should not do with their money. But many of them are my relatives and I know they won’t listen. In short, don’t do anything with you’re money unless you absolutely must. Hoard it. You are poor. No snacks, no movies, no cable tv, and work! Get what you can and save the money like it was your soul, and your children’s souls.
To The Poor: Time to get serious.
This seems apropos.
https://money.cnn.com/2016/10/13/investing/wells-fargo-ceo-resigns-compensation/index.html
Steve