CEO Pay

[lehighguy]

On its face CEO pay seems exorbitant. If I was a board member on a lot of these companies I would probably question alot of these pay packages. And while I'm sure certain fields (how many qualified tech CEOs are there) have extremely limited supply, I sometimes wonder how CEOs in traditional industries (a super market chain for instance) get such high pay packages.

However, I'm not an expert in this field. Boards of directors represent the shareholders of a company. Clearly shareholders want to maximize profits, and thus want to keep thier costs, including CEO pay, down. If a CEO demands too much money a board merely need find another. However, if no adequet replacements are available they have to offer a higher wage. Hence, CEO pay is based on the same supply and demand as any other labor market. There is a supply of available management talent and a demand based on percieved value of those being hired.

First, I propose we take as given that boards of directors "percieve" CEO pay as being fair. Fair being an accurate assessment of supply and demand in the marketplace. They believe they are getting what they pay for, at the least.

Given this, there are two possibilities. One is that boards of directors around the country are, for the most part, vastly overvaluing CEOs value to companies. This seems a bit crazy. Given the sheer cost of this one worker, you would think immense research would go into the hiring process, but then again bubbles happen all the time in the real world.

Second, they are actually worth that much.

[Dan.]

I heard watching CNBC one day that the huge CEO's pay is--I'm not really certain how prevelant this is--the board members showing the strength and might of the company. A "We can afford to pay him/her $X million" sort of things, even in the face of some opposition from the CEOs themselves.

Edit: and often times the shareholders like that since they preceive it as the company doing very well, rather than the company throwing away lots of money on labor costs.

[Mickey Brausch]

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I heard watching CNBC one day that the huge CEO's pay is --I'm not really certain how prevalent this is-- the board members showing the strength and might of the company. A "We can afford to pay him/her $X million" sort of thing...

[/ QUOTE ]That's very interesting. I never heard of that angle before. Sounds like a lot of baloney to me, but it does have a precedent in animal behavior: When two animals or two groups of animals confront each other, one of the two adversaries will often engage in similar "exhibitions of power" by "wasting resources", in trying to scare off the opposition. (Wasting wealth is a male specialty, and also carries that meaning.)

I still say it's baloney, though.

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...even in the face of some opposition from the CEOs themselves.

[/ QUOTE ] Yeah, I'm sure the poor CEO is dragged kicking and screaming to sign on his option bonuses and salary increases.

Thing is I can't google up or even remember any specific CEO to whom such a thing happened. Does anyone?

[MidGe]

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On its face CEO pay seems exorbitant.

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Many of the top tier, and even down from it, are more than exorbitant. They are totally unjustifiable!

[ojc02]

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On its face CEO pay seems exorbitant.

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Many of the top tier, and even down from it, are more than exorbitant. They are totally unjustifiable!

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False. If a CEOs skillful management of a company leads to an increase in profits then employing them at high pay could easily be +ve EV for the shareholders. Consider the scale of the profit increases. Mistakes are made, CEOs do fail, but their employment is usually +EV for the shareholders, if it weren't they wouldn't hire them!

I grant you that some shenanigans do occur, for example, alot of board members are also CEOs of other companies. By voting for pay increases for one CEO they are boosting the average market for their own services when they go looking for more pay at their companies.

Saying that executive pay levels are totally unjustifiable is going WAY too far though. Are you thinking about value creation or what you consider to be fair?

[MidGe]

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False. If a CEOs skillful management of a company leads to an increase in profits then employing them at high pay could easily be +ve EV for the shareholders. Consider the scale of the profit increases. Mistakes are made, CEOs do fail, but their employment is usually +EV for the shareholders, if it weren't they wouldn't hire them!


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You are correct! If a CEOs skillful management of a company leads to an increase in profits.

Very moot point though. No evidence for it at all, if you are statistically minded!

[ShakeZula06]

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They are totally unjustifiable!

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First off, why do you care? It's not your money.

Second, how do you objectively deteremine what salary is justifable?

[El Diablo]

lehigh,

What you're talking about is a largely BS shell game where the same people all scratch each other's backs. A lot of compensation packages, and especially severance packages, are unconscionable. But corporate boards and compensation committees are about as tight a fraternity as it gets.

[lehighguy]

Why are shareholders hiring board members that aren't representing thier interest?

[Skidoo]

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Since board members are appointed by shareholders, why do we get such a poor representation then. Why don't shareholders insist on more involved board members.

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Uninvolved shareholders, perhaps.