Is CEO Pay Too High?

CEO pay again. This article from the Minneapolis Fed looks at efforts to establish that CEO pay is excessive, how pay might be better aligned with the interests of shareholders, and other issues:

Goldilocks in the Corner Office, Ronald A. Wirtz, The Region, Minneapolis Fed December 2006: ...The group: chief executive officers. Their crime: getting paychecks that are simply too big. In the court of public opinion, it's a slam-dunk case: guilty. A thousand—no, make that several million—times, guilty.

The anecdotes of seemingly ludicrous CEO pay almost never stop; every year produces a fresh batch of fat cats to parade as examples of capitalism run amok. But the matter of CEO compensation is more complicated than some normative sense of what the public considers fair. Even if cool-headed economists might agree that CEO pay appears out of whack, they can step back and search for reasons why current compensation levels may be perfectly logical in a market sense.

What comes out in the end is something of a hung jury: Anecdotes aside, a multitude of factors make it difficult to see if CEO compensation is systemically biased and inefficient, and for whom or to what consequence. Indeed, if the matter were so straightforward, there would be no controversy.

Recent research has made some strong theoretical arguments that CEO pay is above what efficient markets would confer. But some fundamental unknowns cast doubt on whether that theory holds up in practice, none of them more critical than the fact that there has been no solid evidence of systematic overpayment—only anecdotes, even if numerous.

Some evidence even suggests—put down those tomatoes—that current CEO pay levels are fair, or at least reasonably so. ...

Critics of CEO compensation point to steep differences between head-office pay in the United States and in other countries as prima facie evidence of off-kilter U.S. CEO compensation. For example, CEOs here make 35 percent to 80 percent more (depending on study) than their British counterparts. ...

The contrast might be even starker than rankings suggest. Researchers like Lucian Bebchuk of Harvard University have uncovered ballooning retirement packages, which are not typically included in annual compensation surveys...

As in the case of someone caught after a crime spree, the evidence of soaring CEO pay just keeps piling up. ...

Even pro-business magazines like Fortune and Forbes have been openly critical of the trend in CEO pay. Says one Forbes article, “What's at stake, in short, is nothing less than the public trust essential to a thriving free-market economy.”

Regardless of whether CEO pay offends people's sense of fairness, even to the point of outrage, that doesn't mean it automatically violates any rules of market efficiency. But at these stratospheric levels, could current CEO pay possibly be efficient? ...

[A]t its core, research on CEO compensation is rooted in principal-agent theory, which examines how a manager (the agent) operates a firm on behalf of the owner (the principal). In the case of CEOs, the common dilemma is getting the CEO to act in the best interests of the shareholders when he or she has inherently different interests and motivation, and holds a significant advantage in information and leverage over shareholders.

CEO compensation should therefore be designed to mitigate this principal-agent problem, providing both incentives and a monitoring effect to better align a CEO's self-interest with that of shareholders...

Whether CEO compensation actually accomplishes that goal is a hotly debated question. Virtually no one is arguing that CEOs are underpaid. The controversy revolves around whether they are appropriately or overly compensated. Answering this question typically involves uncovering whether shareholders have prospered as much as CEOs. In decades past, CEOs were often compensated largely through cash salaries. But over time, added focus on this principal-agent problem slowly shifted compensation schemes toward a greater use of incentives, whereby the CEO would profit when—and hypothetically, only when—shareholders did.

Compensation schemes veered hard toward pay-for-performance in the 1980s... The matter received a further boost in 1993 when President Bill Clinton signed into law a tax-deductibility cap of $1 million in compensation for a firm's top five executives in an effort to slow down what was perceived at the time to be flagrant pay. Prior to this, all CEO compensation was tax deductible, like any other employee salary. With a leash on cash compensation, firms saw noncash incentives as a perfect fill-in.

What's not quite clear, however, is the degree to which rising CEO pay is actually linked to greater firm performance. Chamu Sundaramurthy, Dawna Rhoades and Paula Rechner, in a 2005 Journal of Managerial Issues article, say empirical evidence regarding executive compensation and firm performance “is quite mixed.” Their own results indicate that there is “no substantive relationship between ownership and firm performance.” ...

Bebchuk, from Harvard, has been the general in a small army poking holes in the notion that CEO compensation is truly based on performance. In the past several years, he has published a sizable list of papers on the subject with a variety of cohorts, along with one well-received book ... with Jesse Fried of the University of California, Berkeley.

The thrust of their argument is that CEOs hold managerial power—simply put, leverage—over the boards that set their compensation. The leverage starts at the board nomination process—typically controlled by the CEO—and is reinforced by the information advantage the CEO has over the board in terms of the company's performance and his or her role in it. It persists because board members are generally reluctant to rock the boat and are somewhat toothless to do much given their limited time commitments as directors.

As a result, company boards cannot negotiate CEO pay at arm's length, a critical factor in aligning a CEO's interest with that of shareholders. What happens in its place is a pseudo-negotiation in which the CEO holds most of the cards. ... By playing their hand well, CEOs can extract pay that exceeds fair market value (what economists call “rent”).

In some cases, the design of the compensation process makes matters worse. Boards tend to benchmark pay in terms of what the competition offers. When this happens, boards inevitably approve above-average pay packages because they don't want to send the message that their CEO is average, or worse. Call it the Lake Wobegon mentality, because all CEOs become above average. That's where Bebchuk and others scream foul, because no such arrangement would come from an arm's-length negotiation.

In a 2005 discussion paper, Bebchuk and Yaniv Grinstein, from Cornell University, show that executive pay from 1993 to 2003 “has grown much beyond the increase that could be explained by firm size performance and industry classification.” ... 

Bebchuk and his various co-authors have no particular gripe about the nominal level of CEO pay. But they chafe over the pay-padding they believe results from managerial manipulation of board compensation decisions. They also object to what they call “windfall compensation”—big executive payouts from stock appreciation that stem more from an industry or marketwide surge than from judicious moves by the CEO.

Oil and other energy firms are a good example: Rising stock prices in that industry have been due as much to political conflict, natural disasters and even serendipity than to the particular activities or visions of the CEO. Rising energy prices have lifted virtually all stocks in this sector, which creates windfall compensation for CEOs despite the fact that their company's stock performance was not unique within the sector.

Bebchuk and Fried suggest that performance benchmarks use indexed options that compare a company's stock price appreciation to a basket of competitors, and offer compensation to the degree that the company beats the competition in stock price appreciation and is the result of firm-specific performance. ... The idea has reportedly been slowly winning some board converts.

Bebchuk and others have also zeroed in on other, growing forms of compensation—golden hellos, goodbyes, perks and especially retirement packages—that typically have little to do with company performance.

Bebchuk calls such pay “stealth compensation,” because it is rarely disclosed, or obscurely so when required, and so flies under the radar of investors, the public, even boards themselves. ...

To a certain degree, both sides are swinging at shadows. That is, neither has the weight of hard evidence on its side. The critics of current CEO compensation levels point mostly to theory and to seemingly obvious design flaws, and the weight of anecdote can be pretty compelling. But they typically fail to demonstrate the “so what” factor: namely, that high CEO pay has had a systematically detrimental effect on shareholder value.

Indeed, if CEOs are overpaid, then it would seem logical that the crush of recent research might have calculated, even hypothesized about, the amount of rent being extracted by CEOs. But you'll find no such estimates in the literature. Despite their extensive—and widely heralded—critique of executive pay, Bebchuk and Fried make no estimates of the booty seized by way of managerial power, despite insisting repeatedly that it exists and making numerous reform proposals to constrain its growth.

In an e-mail response to questions from the Region, Bebchuk said the focus of his research “is on the structure of compensation, not on the level.” He added that it's hard to determine exactly what CEO pay would look like with arm's-length contracting. “The absence of arm's-length contracting is likely to lead to pay exceeding the arm's-length benchmark,” Bebchuk said. So, while their argument is intuitive, logical, even seductive, it adds up to something of a “trust us.”

A lengthy review of Pay Without Performance in last year's Michigan Law Review by John Core and Wayne Guay, both from the University of Pennsylvania, and Randall Thomas of Vanderbilt, puts it this way: “It is correct that U.S. CEO incentives and pay are large both by recent historical standards and relative to other countries, and that they have grown during the 1990s. However, there is very little if any empirical evidence that shows that U.S. CEO pay, or its growth, is suboptimal. ... [Bebchuk and Fried] have provided some interesting examples of bad apples, but have not offered evidence to show that the entire barrel is bad.” ...

On the other side, defenders of CEO pay might want to simply plead the Fifth. Though some studies have found correlations between CEO pay and firm performance (specifically stock prices), there is little evidence to suggest a cause and effect—that is, that high stock market returns are the direct result of CEO performance (and related CEO pay).

There are plenty of examples of highly paid CEOs running poorly performing companies, as well as modestly paid CEOs at the helm of high-performing companies. ...

So too are there plenty of examples of pay-for-performance incentives going awry, where CEOs either fudge the books or focus exclusively on enhancing short-term stock prices to the long-term detriment of the company. ...

The shenanigans don't stop there... [C]ompanies nationwide [are] being investigated ... by the federal government or internal auditors for back-dating and other questionable stock-option practices.

So if there is no clear link between CEO pay and firm performance, but also no real firm notion of what a “rentless” CEO market might command in pay, might there be other market-based explanations for why CEO pay continues to rise? Possibly, but none of them extends much beyond speculation.

For example, economic theory would suggest that the passage of Sarbanes-Oxley has helped raise CEO pay, if only to a small degree. The law—mostly derided by Corporate America—makes CEOs liable for erroneous financial statements, which represents a risk factor that would logically lead to higher insurance-based payments for any prospective CEO.

Supply and demand idiosyncrasies also influence CEO pay. For example, there is a growing trend toward hiring CEOs from outside the firm, rather than the more traditional method of promoting from within. In a 2004 paper, Kevin J. Murphy and Ján Zábojník, both from USC, find that outside hires accounted for 15 percent of CEO replacements in the 1970s; by the 1990s, it was 26 percent. Anecdotal evidence suggests it is higher still today and that firms tend to pay more to attract CEOs from outside the firm.

Rakesh Khurana at Harvard has expressed this as the “Super CEO” syndrome—the desire for a charismatic CEO savior. Such a standard artificially narrows the candidate field to existing CEOs or recently retired ones, eliminating many otherwise-qualified candidates.

At the same time, CEO turnover has been accelerating—evidence, some argue, of greater board independence and stricter pay-for-performance demands by these boards. ...

With CEOs having shorter expected tenure, more demands for performance, greater demand for their services and higher personal liability for a firm's financial statements, economic theory suggests that reservation wages—the level at which a person chooses work over leisure—for CEOs should also be going up.

Ultimately, any change in the trend of CEO pay likely will have to come through a changing mindset among boards, which feeds back to much of Bebchuk's arguments. Some research has begun to recast the principal-agent problem farther upstream between shareholders and a firm's board, looking at whether incentives are in place for boards to properly govern and lead firms, including the setting of CEO pay at proper levels.

As one might hope, there appears to be a solid correlation between good governance and shareholder return, though research to date is limited. ...

Better governance doesn't come free, however, and like CEO pay, incentives matter for directors as well. Director compensation has been on the rise, according to separate surveys by the Conference Board, Korn-Ferry and Aon Consulting. Annual compensation runs between $50,000 and $100,000, depending on the sector and firm, with annual increases of late running up to 20 percent or more.

A 2005 study by Paula Silva in the Journal of Managerial Issues finds that boards compensated with equity ownership tend to use a more quantified, verifiable approach to CEO performance. Those boards without stock ownership tend to use more qualitative approaches to CEO evaluation. She also finds that poorly performing firms have boards that use qualitative evaluations of CEOs.

The moral of the story is that current CEO pay levels, whether deemed too low, too high or just right, haven't happened by chance, but by design. And in the future, better design is likely to come about through better corporate governance. That might or might not lead to changes in CEO pay levels, but it would better ensure that CEO pay—whatever its level—is more surely attached to performance.

Comments

[save_the_rustbelt]

Every day accountants and nurses and bricklayers and cooks go to work and do a good job of advanging the company's interests, because that is what they are paid to do.

No one needs to align their self-interests, they just do their job.

Any CEO whose interests do not align with the owners should be fired.

That is, if the spaghetti-spined directors can stop sipping martinis long enough to do their jobs.

[save_the_rustbelt]

Dana Corp.'s back-seat view misses big picture

(The Blade - Toledo)

There are two places to sit in a limo - in back or up front - and the views are totally different.

In back, you glide smoothly through the world, undisturbed. Up front, you dodge traffic and potholes.

That's the case even if the car isn't a limo.

Each time "Ed" has been assigned to pick up members of the Dana Corp. board of directors at Detroit Metro Airport, he's behind the wheel of a sedan or an SUV.

Dana, you might have heard, is in a deep financial hole. So deep, in fact, the bankrupt firm is considering all sorts of ways to climb back up to ground level.

Plant closings. Pay freezes. Selling off holdings. Trimming pension costs.

Oh, yeah - and shedding a promise to provide retiree health benefits.

Dana's 27,000 ex-employees who would be without the crucial benefits they'd counted on for their retirement years are, shall we say, plenty riled up.

And so is "Ed."

He's a young guy, somewhere in his 20s, and works as a limo driver to save for the ambitious future he's planning. An articulate college graduate, Ed speaks slowly and thoughtfully. The word "rash" does not fit him.

"I've spent at least 10 hours sitting in the basement [of the Dana parking garage] to take [board members] to the guest houses," Ed told me.

He's referring to a few houses at the company's sprawling, verdant Dorr Street headquarters - including one house just inside the gate off the Richards Roads entrance, and another house just across the street. If you were staying at one, you could easily wave to someone at the other.

After driving his passengers from the office to the nearby guest house, Ed said, he'd then wait around for another two hours while they ate dinner, "so then I could take two more groups literally the 100 yards across the street to the other guest house."

Meanwhile, he added, another driver ferried others. This was in late spring, in warm (and walkable) weather: "This was after the [March] bankruptcy. In fact, I believe they were [meeting] to discuss those matters."

I'm not using Ed's real name, nor the name of the limousine company where he works, in hopes of sparing his job. But Ed realizes he could be fired, and all he asks of me is to not undeservedly "portray my employer in a bad light."

Ed wouldn't normally pipe up. But he said it's hard to keep quiet when thousands of current and former workers bear the brunt of Dana's financial meltdown while top execs negotiate their millions of dollars in extra "incentives."

"Here are people who've led this company to where they're at now, and it's, 'Hey, give them more bonuses!' It's sickening, in a sense, especially in light of these retirees who might lose all these benefits," Ed said....................

[Bruce Wilder]

One way we know that CEO pay is not "efficient" or properly "aligned" is because it is rarely structured with any downside.

A logical reform of corporate governance would be to allow the pension funds, mutual funds and trust companies, which control so much corporate equity to elect board members of their choosing.

[john c. halasz]

Well, after all, CEO compensation is just dipping into the vast stream of revenues and profits that flow by their way. Even if it's two or three times what it should be, that's just a small fractional difference in proportion to the totals. And in these times of mounting upward redistribution of incomes/wealth/productivity effects and all round asset inflation, is it surprising that CEOs would partake of their "fair" share? Furthermore, the idea that shareholders would be the principals and CEOs the agents is rather quaint, since shareholders, like consumers themselves, are a highly dispersed interest, especially under the assumption of properly diversified investment portfolios, whereas top management/boards are a cross-linked and highly concentrated interest. And just because the old rentier class with its concentration of ownership has disappeared into the shrouds of the historical past, that doesn't mean that capitalism itself, with its basic motive/driving force of the extraction and reproduction of surplus value, has gone by the wayside. Indeed, it's more globalized and triumphant than ever, with all countervailing pre- or anti- capitalist formations and modes having been swept by the wayside. Only the accounting nomenclature and the patterning of flows has changed, not the eternal verities of surplus value.

But 40 years ago, the literary critic Kenneth Burk suggested a different dimension of explanation, though at a time when the contrasts were much less stark, (though I'd imagine he was thinking back to his youth in the 1920's). Capitalist economic relations present themselves as entirely voluntary and contractual, operating solely through the medium of money and self-interest, hence they lack something of the legitimating effects of authority. By creating a stark contrast between the rewards to those at the top echelon and the ordinary rewards to labor, an irrational effect of excess operates, whereby those who occupy the commanding heights of business must be somehow different from ordinary mortals, as if blessed by the gods. It's a magical/fetishistic effect, not all that different from the strange blood-letting ceremonies by which Mayan/Aztec priest-kings held sway.

[Lafayette]

MF: "a multitude of factors make it difficult to see if CEO compensation is systemically biased and inefficient, and for whom or to what consequence"

Why does a highway have speed limits? Because the higher the average speed, the more accidents are provoked and the worse are consequences. The rate at which CEO comp&ben has accelerated is no different.

We are a rules based society, gripped by a conventional wisdom (based upon an fundamenta value of individual freedom), that all should have the basic right to maximize their potential. No one argues that principle. But, there is a context in which it should be applied. It is no universal rule.

Rules mean that there are norms. No rich person is "self-made" on an island. They are products of the society in which they live, its markets and its economy. Their success depends upon a great many factors to which many contribute.

The most important contribution within the large companies that generate the profits (that allow BoD's to determine CEO comp&ben) is that of the entire workforce ... workers, staff, management and top management.

There is – or should be - a rule that the richness generated should be shared by all ... if not equitably at least fairly. Stock options are meant to motivate people, since they share the wealth being created by the company as a whole. Why should incentives be limited to a particular class of worker in a company? Who decided this? Wen? It is a conventional wisdom, one founded in history and handed down over decades. As they say, "It's always been that way ..." That's not good enough.

A CEO should never ever earn more than an agreed upon multiple of the average comp&ben within a company. Never. It is simply not fair to fellow workers. (More so, the sharing out of "incentives" is a legalized method for priviledging a select few at the cost of general shareholder value - since the few are obtaining special treatment. Basically, it is organized fraud of created value ... and it is legal.)

What multiple is "fair"? Good question. That is where the debate should be.

[Lafayette]

NB: Anyone who works for a large company knows that their total income depends upon a "grid" which the norm that specifies pay increases (within ranges) for purposes of assessment.

In terms of assessment, they are graded according the performance generally observed in the company. Stock options, in certain circumstances, can be allowed for excellent performance reviews.

However, a select few, at the top, have no "grid", except the opinion of either the BoD Compensation Committee. The CEO then decides how to share out the real wealth of the corporation with his/her top management - the "team" by which he/she is responsible for running the company and achieving its objectives.

They are using corporate value, its "wealth", without the slightest oversight of those who actually own that wealth, the "shareholders". Yes, there are shareholder meetings, but they mean little or nothing.

Real power is held by the BoD.

Is it that fair and just, that the company be run without any answering to shareholder representatives - elected by the shareholders themselves? Why? How?

Just who does a publicly listed company belong to, if not the shareholders? And, if there is majority ownership, where are the norms or rules that protect the minority investor from abuse?

[Lafayette]

strb: "Ed wouldn't normally pipe up. But he said it's hard to keep quiet when thousands of current and former workers bear the brunt of Dana's financial meltdown while top execs negotiate their millions of dollars in extra "incentives."

In France, the country where socialism just won’t quit, the American brand of capitalism is called "savage capitalism". This strikes a respondent chord with many French, and Europeans, who do not understand how Americans can abide a system that allows top management to pilfer the corporate coffer, regardless of their executive performance on-the-job.

In fact, they can't. This happens because shareholders let it happen. But, Who are the shareholders?, one might ask.

There is no simple answer to that question. It could be a family with majority control. It could be pension funds with minority (but important) positions. I could be the executive stakeholders themselves with majority control. It could be no particular majority control and purely individual shareholder holdings.

The legal concept of shareholding is a bit like the right to vote. Given the right age, any citizen has the right to vote. Shareholders obtain the right to vote when they purchase ownership in the company.

Ordinarily, property rights acquire to the owner certain responsibilities but also certain privileges - the latter being that of the right to vote a BoD. In Europe, these rights are extended conceptually a bit further. The concept of "stakeholder" is taken beyond ownership (by family or executives) and bestowed also upon the personnel. This is done because their work - besides being salaried - also confers them the right to express their view at the BoD level. Where they are allowed to vote on corporate decisions.

So, in fact, employees of a company may be both stakeholders and shareholders or simply Directors. Exercising a somewhat constrained Directorial authority, they are kept informed of the company’s performance, strategic objectives and options, and help decide compensation levels.

Sounds backwards? Socialist? Not at all. It has gone a long way to achieve social harmony between the executive management and the personnel that has allowed the company to be run without union conflicts. It's a win-win situation.

It also keeps BoD operations significantly more clear than the stateside version, where the "boys" make decisions behind closed doors. Such decision-making rarely has the opportunity of an adversarial debate or, even, a fair discussion.

This subject is at the very heart of wealth distribution in an economy. In the past, "tax and spend" was the sole means of redistributing the wealth economically created for communal benefit. Today, as more people have understood the natural advantages of holding stock as part of their wealth, it is more imperative than ever that the wealth created by a company go to those who actually create it. That is the workers, from top to the very bottom.

And, there is no better mechanism for doing so than through stocks - by acquisition at discount or by incentive compensation.

Now is the time to assure that the power at the top is no longer reserved to a select group of people (perhaps no more than about two or three thousand throughout the US) who control the economic destinies of millions.

[a]

save the rustbelt said: "Any CEO whose interests do not align with the owners should be fired."

You took the words right out of my mouth. Everyone else in the company is expected to do their job or get fired. Why doesn't firing work as motiviation for the CEO?

The only reason why I can think of: the CEO has usurped so much power that firing him would create such a power vacuum that the company wouldn't be run well for a certain period of time. The CEO has basically the power of blackmail ("you fire me and I can screw things up so bad..."). It sounds to me that this is a strong reason to use the old German system, where a group of people ran the company and one individual wasn't all-powerful.

[Wimpy]

To stretch Lafayette's highway analogy one step further, every traffic engineer knows that on congested roads the danger lies less in the overall speed of vehicles than the differences in speed between vehicles.

Where CEO pay is concerned, the differences in vehicle speeds between fastest and slowest have become grossly dangerous on our economic highways.

At times like these one wonders where the police are to be found.

[evagrius]

"Capitalist economic relations present themselves as entirely voluntary and contractual, operating solely through the medium of money and self-interest, hence they lack something of the legitimating effects of authority. By creating a stark contrast between the rewards to those at the top echelon and the ordinary rewards to labor, an irrational effect of excess operates, whereby those who occupy the commanding heights of business must be somehow different from ordinary mortals, as if blessed by the gods. It's a magical/fetishistic effect, not all that different from the strange blood-letting ceremonies by which Mayan/Aztec priest-kings held sway."

Exactly correct. It's the creation of a new nobility.

It's an easy phenomenon to observe. All the perks, all the trappings etc; are just exactly that- a way of distingushing oneself as having superior authority, insight and wisdom.

[Tom palley]

This should finally put the nail in marginal product theory. We clearly can't identify the marginal product of CEOs, just as we can't for most workers other than those working on a piece rate system. Looks to me as if modern economics is in deep analytical trouble -- but then again, the emperor was able to walk down the street with no clothes and none of the adults said anything.

[cm]

Wimpy: I think the broad consensus is that in actual traffic, the police are to be found where making the ticket quota is easiest and most opportune. But this analogy doesn't go very far -- speeding enforcement is (semi) anonymous, and the same freeway is used by everybody (no "executive pool" lane -- yet).

[cm]

One thing I haven't spotted in this thread is that boards are largely composed of members of the "executives' club", many of them CEOs, who are effectively high-fiving and back-scratching each other. Unless board seats are assigned at least in parity to club outsiders who don't have this particular conflict of interests (but still have enough stake in the general business), there can be no effective checks and balances, which is supposedly a major job of the board.

Board corruption is not necessarily all a matter of malice, but in good part because closed groups of people sharing similar circumstances, privileges, and backgrounds are prone to groupthink and distorted perception. But neither are checks and balances intended to fight malice, but the creeping corruption of inside circles.

And it's also not just a matter of CEOs, but all top-level executives. CEOs are while perhaps fairly, nonetheless singled out at the expense of the broader picture.

[piglet]

"What comes out in the end is something of a hung jury: Anecdotes aside, a multitude of factors make it difficult to see if CEO compensation is systemically biased and inefficient, and for whom or to what consequence...

Recent research has made some strong theoretical arguments that CEO pay is above what efficient markets would confer. But some fundamental unknowns cast doubt on whether that theory holds up in practice, none of them more critical than the fact that there has been no solid evidence of systematic overpayment—only anecdotes, even if numerous...

To a certain degree, both sides are swinging at shadows. That is, neither has the weight of hard evidence on its side." etc etc.

The article would make sense if it were a satirical exposure of the corruption of economic science. Hey, it *is* a brilliant satirical exposure of the corruption of economic science, only the author didn't intend it. Or did they? It is hard to believe that any self-respecting author would write such a pathetic diatribe and be serious.

[Lafayette]

"none of them more critical than the fact that there has been no solid evidence of systematic overpayment"

What makes you think that the market determines fairly CEO pay?

Conventional wisdom? Then why go looking for "research" that supports your opinion?

[Lafayette]

"One thing I haven't spotted in this thread is that boards are largely composed of members of the "executives' club", many of them CEOs, who are effectively high-fiving and back-scratching each other."

This thread is a continuation of a subject that has since been discussed at length.

I have remarked several times the social phenomenon of which you speak - otherwise known as "cronyism". Or, if you like, the "Executive Mafia".

The Fortune 500 have only, er, 500 CEOs. Have a look at how many cross-sit on boards throughout the economy. And, they meet one other either in the Sierras or Swiss Alps to discuss the world’s weightier problems (and executive pay).

The only remedy is when a legal structure is given to the construct of the BoD of public companies. The power of these Boards is enormous, both for good and for evil.

For the moment, the BoDs can do whatever the hell they want, as long as it is not criminal and, as we have seen, that doesn't stop some of them.

[piglet]

Remember, we just heard that job protection is "bad for workers". We heard that workers are paying dear in mental health for the "privilege" of "severence payments" totalling a few weeks' salary (in Canada).

I just wonder why CEOs keep accepting those severance packages (often representing several years's pay). Don't they understand that "severance packages are bad for CEOs"? And hy aren't all those clever economists eager to tell them?

[Bruce Wilder]

TP: "Looks to me as if modern economics is in deep analytical trouble . . ."

Reconcile marginal product theory with principal-agent analysis?

Acknowledge that the principal-agent framework is an analytical subset of a logically complete analysis of production control?

Develop a theory of production, which includes parameters of production process control?

Don't hold your breath.

[fiskhus jim]

Of course, Adam Smith provided at least one very clear explanation for the trend: These CEO's are people who not only want a lot of money, they want more money than you have.

[billy]

Leaving aside entreprueners( who deserve to get more, since they they generate new wealth), CEOs are not that indispensable.

Obviously, the only way to test it would be to fire all the Fortune 500 CEOs, and see if another crop of 500 CEOs would do the job equally well. If they do, we will know that the first 500 are easily dispensable, and there is more of a market than is made out.

The reason it wont happen is simple. The elite clubs of CEO's hire each other due to the board structure. They will never look for the best deal - that is get value for money.

Much is made out of "CEO Greedypants increased the market value of the company by billions. So paying him millions is OK"
I dont see why the same bule-collar logic should not be applied to the CEO too. Just because the market value increased dose not mean I have to pay him millions. The owners should be able to make him do the same work for less, probably for thousands.
Why should he get millions? Hired help must always be paid as little as possible.

There is no reason to pay a CEO anything other than a fraction of these exorbitant sums, if across the board, the entire market agreed to that. The entire dance to "lure" a better CEO with a larger paycheck is totally overdone; most of the time the next guy would be equally good.

The only exception is the entrepreuner, who if he/she does not get what they wants, can start their own enterprise. But that exception only proves the rule about CEOs being hired help.

All this is moot, when crony-capitalism rules. To get the big defence contract, the aircraft company has to get someone from the aristocracy on the board and CEO slots; To get that foreign market bottled up, the secretary has to twist the arm of the vassal country, and better get someone who knows the secretary.

Other than ordinary people selling the market and stuffing the money in their mattress, or buying real private assets, this looting will not end.

[adam]

a lot of times board members on compensation committees rely on third party compensation consultants to set ceo pay. supposedly there are changes taking effect this month requiring disclosure of which firms are used. this should help stockholders evaluate how well boards do their job.

i'm pretty sure that one of the sabanes oxley reforms cut down on a lot of the back scratching "you sit on my board and i'll sit on yours" stuff that went on prior to the law. large pension fund holders like california's calpers do care about compensation and giviing them more info will help.

i'm glad that we are seeing some of the authors' suggestions taken to heart by boards and that compensation metrics based on performance versus peers rather than say, a rise in oil that lifts all oil execs pay. it seemd odd to me when compensation over a million dollars was no longer deductable but option grants were not. there was an obvious lottery effect there. just hand out some options and be done with it.

[Lafayette]

Just in Time ...

>Study finds board member complicity in backdating stock options

>NEW YORK: Board members were not just blissfully ignorant or bystanders when they backdated stock option grants for corporate executives, according to a new study. About 1,400 outside directors may have received manipulated grants during the past decade.

From New York Times, today

[adam]

ken starr is now filing a suit saying that sarbox is unconstitutional. go figure. i hope if it is it is immediately modified so that it is constitutional.

[Lafayette]

"Why doesn't firing work as motiviation for the CEO?"

Oh, but it does. Recent history has shown that CEO's exiting from their jobs has been on the rise the past two years. There is no longer any automatic tenure in the job, just because the BoD likes the colour of your eyes.

CEO's are tasked by objectives just like all employees in a company (should be). So, what they "do" is a direct consequence of those objectives.

If they have short-term objectives (p/e ratio, quarterly profits, less than two year running profit figures), then, for sure, they are going to undertake whatever measures are necessary to meet those objectives. Can anyone blame them?

How does one change the objectives such that CEO's take focus on the long-term durability/survival of the company? It's commitment to employee training and advancement, to new product development that will spark revenues beyond a few years timeframe, or incentives that don’t verge on pilfering shareholder value ... well, that is a damn fine question.

I'm still waiting on someone in this forum to explain.

To me, the responsibility of members of the BoD requires a legal framework. They have a fundamental duty to shareholders (company owners), which is the legal basis for fraud, should that occur. But, their responsibilities are very broad and have a strategic dimension that assures that the company maintains/enhances its commercial success. That is a difficult responsibility to define in legal terms. Who decides negligence and against what criteria of judgement?

Frankly, nonetheless, just about ANY legislation would be better than the legal black hole that presently allows them to do just about everything that tickles their fancy. For the moment, their positions are fiduciary, meaning that they are entrusted with the well-being of the company. But, who is measuring this?

Nobody, until a crime is discovered/reported/leaked, etc. Like all matters of law, you are supposed innocent until PROVEN guilty. So, that gives one a very large latitude of manoeuvrability.

Someone has to blow the whistle. But, where are the policemen? We thought that the accounting companies were policing them.

Got that one wrong, didn’t we? But, maybe what is going wrong cannot be foretold from the numbers? Who on the BoD is there to "blow the whistle", and if they do, will they be charged with divulging confidential information?

Ain't easy, is it?

[adam]

well the board of directors usually fly in about 10 or so times a year and have a meeting. pretty hard to get a lot more than just a summary of what's going on. i don't really like the whole model but don't know a better one.

i do remember from reading a little about stiglitz in an online econ ecnyclopedia where he said stockholders have a hard time managing managers and it is a problem with the neoclassical model.

"shareholders have only limited control over managers. Information about what management is doing, or should be doing, to maximize shareholder value is costly. Thus, shareholders often limit the amount of "free cash" that managers have to play with. They do so by imposing sufficient debt burdens to put managers' "backs to the wall" so that managers must exert strong efforts to meet those debt obligations, and so that lenders will carefully scrutinize firms' behavior."
http://www.econlib.org/library/Enc/Information.html

if you look at enron (worst case) the banks were complicit in taking shareholder $$$. many settled in court. sarbox also increased the number of independent directors. so lot was done on tightening up boards there.

auditing wise sarbox (as implemented by the sec) made auditors do only auditing and can't even advise a company on what they could do better. (many say this is too extreme, including dems and reps that voted for it not thinking the sec would be so strict in interpreting)

however, over the weekend i saw an interview with former ge ceo jack welch where he said most ceo's he's talked to lately tell him that all the board members seem to care about is if the ceo has done anything that can embarrass the company and don't want to spend board meeting time discussing the company issues. so, if true, then what good are they? just covering their butts to collect a check.