Monday, May 18, 2009
Why are CEO salaries so high?
CEO pay relative to average worker pay skyrocketed in recent years from 30 times the average to 110 times. This change prompted much debate. Does it reflect rising CEO value/skill/talent or something else?
This article, from before the crash, has some ... interesting ... quotes from some big shot CEOs, e.g.,
This article, from before the crash, has some ... interesting ... quotes from some big shot CEOs, e.g.,
Other very wealthy men in the new Gilded Age talk of themselves as having a flair for business not unlike Derek Jeter’s “unique talent” for baseball, as Leo J. Hindery Jr. put it. “I think there are people, including myself at certain times in my career,” Mr. Hindery said, “who because of their uniqueness warrant whatever the market will bear.”
He counts himself as a talented entrepreneur, having assembled from scratch a cable television sports network, the YES Network. “Jeter makes an unbelievable amount of money,” said Mr. Hindery, who now manages a private equity fund, “but you look at him and you say, ‘Wow, I cannot find another ballplayer with that same set of skills.’ ”
This article further summarizes the debate and provides a summary of new research into the topic:
The popular (and populist) perception is that of America's CEOs greedily rubbing their hands together as they approve their own paychecks, and there certainly has been some of that. Others argue that in most cases CEOs are richly compensated because they're so good at what they do.
Several recent studies stake out a middle ground, assuming that CEOs are neither villains nor business masterminds. These studies argue that the seemingly innocuous practice of benchmarking pay against other companies' CEOs may be to blame, because the list of comparable executives is often formed selectively to include highly paid peers and to omit lower-paid ones. Though this opportunistic selection of peers may result in only a small bump to CEO pay in any particular year, over time, the rising tide of peer pay may well account for much of the increase in corner-office salaries that we've seen in recent decades.
// posted by BW @ 8:11 PM 
Comments:
<< Home
In conjunction with what the author of this article said, could part of the reason that CEOs have such inflated salaries be due to their desire to signal their image of how they think they are performing as CEO to other companies? For example, I think that part of the reason for this may be, aside from greed of course, that they may not be completely happy at their current company and so they get the board of their current company to increase their salaries to help compensate for it. Then they take these inflated salaries and use it, along with their current company's performance, to signal to other companies that they are worth a huge sum of money if in the event that that board of directors wants the CEO to come head that company. And as a result of market demand for competent and effective CEOs, firms will pay the demanded salary.
I'm sure this perspective has to be on the minds of several people, so I'll be the first one to go ahead and say it. CEO's don't deserve to be paid as much as they do. Neither do professional athletes or investment bankers. There are jobs out there that are equivalently, if not more, difficult in terms of mental and physical demands, and yet you'll be hard pressed to find a job that pays anything close to what CEO's get. While I understand that they are the ones in charge of multimillion dollar firms and are being compensated because they have been given a huge responsibility, I've always had this romanticized belief that nobody in their right mind would ever WANT to take on any huge responsibility in which the lives of workers, customers, suppliers, the industry, the economy, etc are dependent on the firm-related actions I take. Those who don't want the job, but realize its necessity are the people who I see most fit to take it.
# posted by 
: 5:26 AM
: 5:26 AM
I remember talking in a management class about this topic. My professor mentioned that the average stint of a CEO is something like 2 years. So this means a couple things. Most CEO's do not meet the expectations of those that hire them, so if a company finds a CEO they really like, they may have to pay him a ton of money to keep him around. Also, the pressure on these CEO's and the risk of being fired is so high that they may demand these high wages because of the risk. That said, it certainly seems as though a lot of these people are vastly overpaid, and seeing as most don't last very long, it seems hard to make the argument that they really are very good at what they do.
# posted by : 2:17 PM
: 2:17 PM
Especially during the current financial crisis, CEO salaries are a highly controversial topic. Popular sentiment is that they are exorbitantly over payed. In terms of intelligence or nominal productivity, a CEO is certainly not 100 times more valuable than a low-level employee. It is surely plausible however, that a CEO is 100 times more ultimately valuable to the company's bottom line. Especially today, a confident and competent CEO can dramatically influence the direction of a company. A statement by the CEO can greatly change the stock market's valuation of a company. This would in turn affect the employees and shape future decisions. For example, Steve Jobs is likely much more than 100 times more valuable to Apple than a low-level employee. His return to Apple drastically altered the direction of the company, and his subsequent health issues have caused doubts about its future.
# posted by : 6:20 AM
: 6:20 AM
It seems like this has been a recurring topic in many of my Econ classes in the past few years. While i am in no position to judge the importance of any employee to a certain company, i do feel that CEO salaries are too high, especially when you have CEOs making millions a year working for companies that are losing money. Obviously as in any business, the higher ranking employees deserve to earn a higher salary but in no way should CEOs be making 100 times more than the average employee. There is certainly more risk being in that position, especially when things go bad. But at the same time, they are the ones who get most of the credit when things are going well. Will all of this, i would guess that a majority of us, myself included, wouldnt turn down these inflated salaries.
CEO's get paid a lot, and for good reaason, right? American society has created the richest people in the world through our form of economic system; capitalism, but does being free warrant the incomprehensible gap in wealth distribution? Being the CEO means the well being of the company is in your hands. In some cases, these companies are worth billions of dollars. These CEO's are responsible for well being of thousands of investors. Moreover if a company the size of Citigroup was to failure, it might cause market failure. CEO's can use a number of rationalizations to argue why they make what they make. Conversely, is the marginal value of one employee(CEO) 50-100 times greater than another? By allowing these multi million dollar salaries you would agree that CEO's are potentailly 100x more valuable to the success of the company than a normal employee. I may never acquire the same wealth as the Carnegies or Vanderbilts but I'd sure like the dream to live on. Capitalism is here to stay.
# posted by : 7:31 PM
: 7:31 PM
I am still yet to hear one good argument against CEO's or professional athletes being paid enormous amounts of money. If one person worked so hard as to become the top of firm, he should be rewarded for his efforts! Then some will say, "That is true, but he should still be earning about $500,000 instead of $3,000,000. $2.5 Million of his salary should be dispersed to his workers." If a CEO is earning a yearly wage of $3 million, he must be in charge of a very very large business. We will say the business has about 3,000 other employees. If it were dispersed, each employee would earn an additional $833. A brilliant mind needs to be paid an almost infinite amount so that he stays with the business longer. The rest of the workers, who mean very little to the business, are simply losing out on $833. Also, a smaller percentage of the $2.5 will end up back in the economy if it is given to the employees because they will save it.
If you think athletes earn too much money while others deserve it more, what is your solution? Here is a suggestion, gather tens of thousands of people, 17, 82, or 162 times a year, to pay 40 bucks and go to the local elementary school and watch the single-mother of 2 teach the alphabet all day. Athletes earn so much because so many people pay so much money to see them. Also, get the teacher sponsored by Nike.
If you think athletes earn too much money while others deserve it more, what is your solution? Here is a suggestion, gather tens of thousands of people, 17, 82, or 162 times a year, to pay 40 bucks and go to the local elementary school and watch the single-mother of 2 teach the alphabet all day. Athletes earn so much because so many people pay so much money to see them. Also, get the teacher sponsored by Nike.
If you can make it to the top, you deserve the position. The salary you earn is what you should earn. If the person is not qualified for the job or the wage, the board of directors should do something proactive, fast.
There's a reason why it call CEO because it's the top position of company. Yes, you may get a large pay check every month but the opportunity cost is the amount of time and effort you spend from the start of no body till now. As, CEO carry more responsibilty than others. If he or she made a bad decition which leads the whole company only makes a little, then he or she has to quit or talk to bank for loans. If CEO is really easy position, then every one in the world can be CEO. It's not just the pay check and the title that makes the difference, it's the hard works and responsibility that matters.
# posted by : 2:22 AM
: 2:22 AM
There's a reason why it call CEO because it's the top position of company. Yes, you may get a large pay check every month but the opportunity cost is the amount of time and effort you spend from the start of no body till now. As, CEO carry more responsibilty than others. If he or she made a bad decition which leads the whole company only makes a little, then he or she has to quit or talk to bank for loans. If CEO is really easy position, then every one in the world can be CEO. It's not just the pay check and the title that makes the difference, it's the hard works and responsibility that matters.
Post a Comment
# posted by : 2:22 AM
: 2:22 AM Subscribe to Post Comments [Atom]
<< Home
Subscribe to Posts [Atom]