CEO Pay

[bobman0330]

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A company that is "un-takeover-able" (if this even made sense) is not, however, immune to competition. If this executive compensation is such a "problem" other firms should be able to eat their lunch without much effort.

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Maybe. But a lot of executive comp is stock-based, which means that it hurts the equity owners (by diluting their positions) rather than the company, because there's not a direct cash payout. In the very long term, it might make it harder for the company to raise further equity capital, but that's not going to stop anyone.

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I'm still wondering why this "problem" is even a problem for anyone other than shareholders of the particular company in question.

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It's not, but it's a problem encountered by shareholders in general, and it's effectively impossible to solve on a company-by-company basis. Just the sort of thing we have a government for... (Although I don't actually think there is an effective government solution for this particular problem, it's foolish to argue that it doesn't exist.)

[natedogg]

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(Although I don't actually think there is an effective government solution for this particular problem, it's foolish to argue that it doesn't exist.)

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I argue that it doesn't exist. Shareholders are under no obligation to invest in a company that overcompensates executives if they think they find a better investment elsewhere. Furthermore, anyone who thinks that business competition would ignore a glaring inefficiency like overcompensating CEOs is... as you say... foolish.

If Chevron could get the same or better results by paying a CEO one million per year they would. Why you or anyone else thinks otherwise is beyond me. The board members hold shares too you know. And Chevron is competing with Exxon and BP etc. If Chevron can reward shareholders better than Exxon by paying CEO on the cheap, there's no reason not to. The board would benefit DIRECTLY from a rise in share prices so arguing that the board is averse to maximizing the efficiency of the executive team is... foolish.


natedogg

[bobman0330]

-Directors generally don't own tons of stock in their corporations. Their financial incentives are far outweighed by nonfinancial incentives to retain their prestigious positions, be part of the team, and not make enemies. Some corporate governance scholars have argued that directors should have high-powered incentive packages, like officers, and they often do in private-equity-run corporations, but it isn't the norm in public companies.
-Direct business competition won't stop execs from overpaying themselves. It might be a check on them lazing about and playing golf all day, but not on options. Say you're the CEO of BP, and you find out that Exxon gave its CEO $100 million more of stock options than it needed to. What exactly are you going to do to outcompete Exxon? The stock option decision won't affect their line prices, and it might even help them land a better, harder-working manager than they efficiently require.
-The market for capital might constrain this sort of behavior, but I don't see how. Sure, some of the shareholders might sell and buy a different stock, but who cares? Even if the stock prices go down, there's not much of a check, especially since the price effect will be small.

[JuntMonkey]

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EDIT: also, I'm still wondering why this "problem" is even a problem for anyone other than shareholders of the particular company in question.

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Because capitalism is evil and nobody should be allowed to earn any money beyond an arbitrarily determined number.

[bills217]

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EDIT: also, I'm still wondering why this "problem" is even a problem for anyone other than shareholders of the particular company in question.

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Because capitalism is evil and nobody should be allowed to earn any money beyond an arbitrarily determined number.

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Finally! Someone who gets it! [img]/images/graemlins/grin.gif[/img]

[Howard Treesong]

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If the CEOs are truly getting overpaid by an amount that affects shareholder value I expect that every VC in the country would be glad to hire him to help them retain the right executive team, and every fortune 500 company, whose share are mostly held by fund managers and retirement accounts, would also be glad to learn from him how to maximize shareholder value by paying the CEO less money.


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Buyout funds have been piling hundreds of billions of dollars into buying public companies and replacing their inefficient management with <font color="red"> better-incented </font> management for decades now. A lot of public companies are effectively un-takeover-able though, so the problem will persist.

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Sounds like you're saying that the private guys make even more.

[natedogg]

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-The market for capital might constrain this sort of behavior, but I don't see how. Sure, some of the shareholders might sell and buy a different stock, but who cares? Even if the stock prices go down, there's not much of a check, especially since the price effect will be small.


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Then obviously the problem is not much of a problem. The effects are so small that interested shareholders don't care, according to your own analysis.

natedogg

[bobman0330]

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If the CEOs are truly getting overpaid by an amount that affects shareholder value I expect that every VC in the country would be glad to hire him to help them retain the right executive team, and every fortune 500 company, whose share are mostly held by fund managers and retirement accounts, would also be glad to learn from him how to maximize shareholder value by paying the CEO less money.


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Buyout funds have been piling hundreds of billions of dollars into buying public companies and replacing their inefficient management with <font color="red"> better-incented </font> management for decades now. A lot of public companies are effectively un-takeover-able though, so the problem will persist.

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Sounds like you're saying that the private guys make even more.

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Yeah, but they don't get $200 million severance packages or backdated options.

nate,

True, it's just a drop in the bucket to the stock market, but it's a very big drop in an extremely big bucket. Even if there's no practical solution, the problem should be acknowledged.