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.

[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.

[HeavilyArmed]

If market forces are free to work then CEO pay will tend to the level of its worth, all things considered. If there is some market disconnect then anything is possible.

How do you assess the efficiency of the market? Tough question. The fact that it's a small market with many mutually interested participants is troubling. Add to that the multi-level disconnect between shareholder and board member and final decisions. I figure that overall there's plenty of room for sweetheart deals. It's just human nature.

It's probably more important to ask if there might be a better way. I doubt it.

[bobman0330]

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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

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I don't believe this is a good thing to assume. There's a Scandinavian economist, whose name I forget, (I believe he's a Nobel laureate), who has written extensively about economic reasons for CEO pay to be inflated. Interestingly, he's also a director for a big corporation. And he regularly votes in favor of the sort of pay packages he academically suggests are inflated.

The fact is that CEO comp. is not really a big deal in the grand scheme of a major corporation. So, if you're a director, why would you risk alienating the most important individual in your company over an extra million dollars? It just doesn't make sense, even if it's a waste of money.

The same basic principle prevents institutional shareholders from taking action in all but the most egregious cases. Sure you could launch an expensive proxy fight and make a statement, but even if you're completely successful, all you've done is save the corporation a million dollars. Not worth it.

[MelchyBeau]

Don't forget those severence packages

how about $200 million for leaving a company after overseeing a 40% drop in stock price?

http://www.newratings.com/analyst_ne...e_1448247.html