How much is too much when it comes to executive pay? That’s a question being asked almost daily by the public. And it’s not just happening in the United States. In France a lobby group is pushing for a law that would limit executive rewards and bonuses.
The outrage over AIG executives receiving bonuses has only heightened the anger many people feel about CEO compensation. But a “fair” CEO salary isn’t such an easy figure to determine, says Edwin Locke, a former management and psychology professor at the University of Maryland.
“Fair is really, at least at the time of hiring, what the market price is,” Locke says. “What’s the intrinsic value of a baseball player?”
The answer? Locke says it's “what the fans are willing to pay to see a ballgame.
But Albert Cannella, who will serve on a panel with Locke at the conference, said the market for CEOs doesn’t always work the same way as the normal marketplace.
“That statement is much more correct if CEO salaries were established in a marketplace where there’s a lot of buying and selling going on,” said Cannella, Koerner Chair of Strategy in the Department of Management at the A.B. Freeman School of Business at Tulane University. “That would arguably be the case if CEOs changed companies frequently, and we could observe a lot of CEOs leaving their current positions for other CEO positions at higher salaries. However, this is extremely rare. The evidence suggests that CEO salaries arise from private – i.e., covert – processes that they have significant control over.”
Cannella added that one of the factors leading to these high salaries is that CEOS often exert tremendous influence over the boards of their organizations and eventually their own compensation.
“Boards don’t have to agree to those contracts in the first place, but they do,” he said. “A lot is done in the honeymoon period following the CEO’s hiring when everyone feels great about the person.”
Locke rebuts Cannella’s claim, though, saying the few number of CEOS available puts them in high demand.
“Good CEOs are extremely difficult to find,” he said. “There aren’t that many, and you have extremely high turnover.”
Locke also pointed out that even though CEO salaries may dwarf their employees’ pay, that doesn’t mean it’s undeserved.
“There is no intrinsic amount of difference that there should be between the CEO’s salary and the other employees, he said. “If a CEO is doing a good job, he might be the reason the company’s doing well and the reason employees still have a job.”
So, what is a fair method to determine appropriate CEO pay? The two conference panelists offer some suggestions, but I’m curious as to what IW readers think about what constitutes fair executive compensation.
About 30 times the lowest paid employee is a fair CEO salary. The remarks about their value to a company are overstated: they can do little without the support of the other employees, regardless of their claimed abilities. As for their scarcity, most companies have one and one to spare and many hopefuls. They were not always so well compensated and companies did well enough.
It is in the nature of the ideology of "management" where the failure is found. We did not arrive at this point by pure coincidence and we know there are people who had the wisdom to see it coming before it got here, but were not CEOs, and those people are not enthralled in their education and thinking to the management theories that are the basic staple of most business schools in the U.S.
Look, we already know that focusing the main thrust of any enterprise to maximize quarterly profits is a prescription for long term decline. So where is the lack of clarity with this coming from? What is the motive behind what is being thrown up to confuse our understanding of this? Yes, of course the answer is self-interest as maximized personal compensation and all of the propaganda machinery to support that end (think Fox News, The Wall Street Journal etc.).
Simply put, Capitalism is the expectation of profits through the exploitation of resources and labor. To maximize profits is to maximize exploitation even to the detriment of society but to maximize short term profits is even to the detriment of the long term health and viability of any given company.
What is so hard to understand about this fundamental principle?
Personally I would put all of the bailed out companies on the GS wage scale, bottom to top. If it is good enough for the skipper of an aircraft carrier - then it is good enough for a banker. And it would probably be better for a lot of the folks.
There is a difference between the founder of a company, or the owner, and the hired hand brought in to feed the chickens.
At one time I packed a gun, rode a horse and pushed cattle, got paid to do it. A dude pays to ride a horse. A horseman rides his own horse. A wrangler is a horseman for someone elses horses. A cowhand or cowboy gets paid to ride a horse and push cows. The Rancher owns the cows, and pays the cowboys.
A good ranch manager builds the stock, he gets the crops in and harvested on time, he keeps the horses shod and the machinery running, he manages the men and gets a good price at market in the fall. But the rancher still owns the cows.
A good ramrod will keep the boys in line, will get the cattle moved and the roundup done before the snows. But the rancher still owns the cows.
A good cowboy will buy or lease land buy cows - he can become a rancher. But when he works for someone else, he knows who owns the cows.
A rustler is somebody that forgets who's cows they are. Real similar to a chicken thief.
I was lucky enough to work for real Ranchers. I was lucky enough to meet some real old timers, They hung rustlers. - If they didn't shoot them. I've seen the graves, I've held the rifles. -some of the toughest were old ranch women, I've seen them face down texas oil men, roughnecks and riffraf of every sort, made you almost feel bad for the varmints. Almost.
It does wonders for your confidence when the two of you are looking down each others gun barrels -and you are on your own ground. You stand your ground, you ride for the brand. You watch the bosses cattle, you defend them, you mend the fences, brand the stock, you fight floods and breath dust, you cut hay, you clean ditches and water crops, you kill the coyotes, and deliver lambs at 2 am, you trap the beavers damming the ditches, you get out in 80 mph wind in 60 deg below zero weather and chop water holes and pitch hay, you feed the cattle and pull calves and break horses. and you keep you boots next to the bed. Been there, done that. ......Long ago..... $10 a day.
These part-time, temporary employees that call themselves "ceo"s are just a bunch of hired hands. It doesn't matter that the owner is a group of stockholders. It doesn't matter that the owners are a bunch of old ladies with a retirement fund or a handfull of GM stock- they own the cattle. The ceo is just a hired hand hired to feed the chickens.
The lowest form of life is someone that would work for a rancher and steal his cattle. putting your brand over someone elses can still get you killed. To put your brand over your bosses, that is as small as a man can get. Not worth the lead. Not worth as much as an empty beer can.
So back to the question; Are these wandering CEO's a bad deal? I would have to say yes. Any officer, or emplyee who doesn't do his best to build up the company, for the long term, who spoils the seed grain, wastes the buildings and breaks the machinery, starves the cattle and forgets to water the horses, who takes a cut of the auction reciepts before he gives it to the boss, who loses track of who the owner of the cattle, chickens, plant, capitol, stock etc, is - Those aren't cowboys, the aren't ranchhands, they are bums and hustlers, they are rustlers, thieves and a waste of skin and air, those employees need to be fired. Yesterday.
......... buy some rope..... 'Lots of empty trees out there.....
Lets see - a CEO making 20 million a year, assuming 48 work weeks of 5 days each is making $82,000 a day, likely twice in a day more than most of his employees make in a year.
Personaly I can't imagine what a CEO does to "earn" that kind of loot, I mean, how hard can it be schmoozing all day with your pals at the country club, or jetting off to some resort somewhere can be?
I think it should never be more than 4-5 times what the average wage of a company is - that would seem very fair and reasonable to me.
In Japan for example, if a CEO is caught in scandal or drives his company down, they resign in disgrace, some even commit suicide. Here they fire up the stogie, pour a glass of scotch, slap each other on the back and give themselves a huge bonus
__________________ Who ever heard of a skilled labor shortage that did not have a corresponding upward pressure on wages?
Comparisons between what American CEO"s and foreign CEO's are very eye opening. It would seem that our pay scales are "way out of wack" when compared to the rest of the world! What do you think?
Found a good book last year, about the history of the Newport News shipyard written about 1972. Homer L Ferguson took over as company president just before WW1 and served until just after WW2. During his time the yard built a large portion of the US Navy fleet and many merchant ships. In reading about Mr Ferguson I was impressed that he saw himself as an employee, one with a lot of responsabilities, and authority, but an employee. He was not allowed to buy any stock until almost the end, but he was paid about $40,000 a year if I remember correctly. this at a time when the yard average was about $1,000. The yard employed about ten thousand men at various times, sometimes more, a lot of the time fewer. The top income tax rate at the time was about 90% - so he paid the majority of his income as taxes.
So the numbers work out to be, about 40 times the wage of the average worker, and about 1/250th or 4/10 of 1% of the payroll.
At this time the shipyard was owned by the Huntington Family, the Huntington Museum in California was built in part with the profits of the yard. I don't remember the profit numbers, but the yard was improved and updated many times with re-invested profits.
Was Mr Ferguson worth 40 riveters? to the company? Probably.
Did he put in as many hours as the men under him? The record indicates that he was there 7 days a week.
Was he intimately aquainted with every facet of the company> Did he know the men, materials and processes? Did he deal with bankers, suppliers and customers? Did he share the fate of the company, and care about his men and treat them fairly. The history states that he did.
The Huntingtons were absentee owners. They however would not have hesitated to fire a non-performing employee.
Too many companies now are run by men that you couldn't ask the questions above about, they would fail the test.
First, I think that it is important to both thank and commend wesdavidson for his very informative, thoughtful, and appropriate posts in this thread, and I'm surely with ya, wesdavidson, on the rope and tree comment.
I think we could apply the analogy of a football team to this issue. How far do you think Don Shula, or Ara Parsegian, or any of the other successful and legendary coaches would have gotten without equally talented and dedicated players? In my experiences as a business owner and leader, I can truthfully say that the success of that business was the result of a concerted and well-planned team effort on the part of each and every one of the players. I could have been the smartest and shrewdest businessman but without the full respect and support of the entire workforce, it would have been for nought. We weathered our storms together and with equal suffering - it made us a lot stronger going forward.
It certainly does seem that today's CEO's are taught a hefty amount of arrogance and entitlement in the nation's business schools, without an accompanying dose of moral responsibility and respect for the true role that a CEO should play. As an old country boy used to comment to me, they "get too wrapped up in their own self-importance".
I have recently read of a number of accounts of small- and medium-sized manufacturers who are remaining very successful and the common thread of stories is the dedication of the owner/CEO to the workforce and the common success for all involved. There have been many stories that focus on the results of the economic downturn and how the businesses have responded. In every instance, it involves sacrifices for all of the players, including the owner/CEO, by virtue of some reduction in work hours that permits the workforce to remain employed and with the commitment that results from such efforts when the economy recovers. As wesdavidson points out, there is a significant difference between owning the cows and tending to them. One can only hope that enough shareholder groups are enraged and energized by the current state of affairs to demand changes that will allow the reinstatement of reasonable compensation for upper management rather than the outright thievery that is rampant today.
I saw an op-ed cartoon the other day in my newspaper that depicted a stock advisor suggesting a substantial investment in anyone making pitchforks. Proverbially, it may very well come to that.
It certainly does seem that today's CEO's are taught a hefty amount of arrogance and entitlement in the nation's business schools, without an accompanying dose of moral responsibility and respect for the true role that a CEO should play. As an old country boy used to comment to me, they "get too wrapped up in their own self-importance".
You are so right - you are describing the MBA mentality. today's business "leaders" only know how to chop, cut, close, downsize and outsource. So precious few have what it takes to build, create and innovate - the ones that do are the rarer breed of folks that rose up thru the ranks of an industry or built the company themselves rather than go straight to the top out of some fancy school and/or thru well placed connections
A coworker of mine calls it the "born on third base and think they hit a triple" syndrome
__________________ Who ever heard of a skilled labor shortage that did not have a corresponding upward pressure on wages?
Are CEOs Multimillion-Dollar Busts?
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