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Why CEOs make so much money

dylancatlow
Posts: 12,245
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4/29/2015 1:11:50 PM
Posted: 1 year ago
"I write to give you my personal perspective on why CEOs make so much money as you describe in Coming Apart. I'm not writing about the really obscene hundreds of millions that clearly are the result of clubbiness and abandonment of a sense of seemliness, but about why the average is $12 million today and increasing every year.

I have served and continue to serve as a director of public companies. I was for more than a decade the CEO of a company that makes [an important but unglamorous product]. My compensation started at less than the $1 million per year you cite as the base year in your study and became more than 10 times that amount for my last several years. At least that was what the proxy statement showed, but it was actually a good bit more when it all paid out because the principal component was performance-based compensation that increased in value due to our company's financial performance and stock price increases, with the result that in some years my compensation exceeded 20 times that amount.

Now while I was CEO our company grew almost ten fold in size and profitability, and I did have opportunities to leave for other lucrative jobs. So you could argue both that it was necessary to pay me that much and that it was a good deal for shareholders. That isn't the point. Surely I would have worked there or somewhere else just as hard for much less if there were no choice. I loved my job and was thrilled to have it. Why was it that much?

On multiple occasions the SEC [Securities and Exchange Commission] amended its rules to increase the disclosure of compensation data and to force boards to explain their rationale for the amounts. That, combined with the influence of the arbiters of corporate governance, created an inviolable requirement for compensation committees to be advised by consultants. A perfect recipe for increasing compensation.

Let me explain in my own case. I asked only that I be paid at market for my position and performance, and that my compensation be very heavily weighted to performance. Henceforth, I could rely on our consultants to provide essentially perfect market data on comparative compensation, accompanied by recommendations appropriate in light thereof, and there was really no need for much discussion or worry as long as our company was successful.

From the standpoint of my own conscience, you raise the moral question of its "seemliness." Consider that the vast majority of our hourly employees earned hourly rates between $13 and $30 and the next highest paid executives made a third as much as I did. I could, of course, rely on the market, since it set my compensation, and given our performance I could feel I earned it. And, lastly, I made nothing like the really obscene compensation of some CEOs, of which there are a goodly number of examples, let alone of the athletes, private equity founders and, worst, the entertainers. So I slept okay, although admittedly not always and not without some anguish.

But what troubled me then and now from a policy standpoint was why the average and, worse, the poor performers make almost as much. We can't disregard the fact that the revenues, earnings and scope of a Fortune 500 company today are integral multiples of those of decades ago, and they continually grow, which would account for some increase. But so much? And so uniformly without much regard for performance?

Thank our regulators and corporate governance efforts to reduce CEO compensation through disclosure and oversight of board decisions. I've been a long time observer of public companies and a reader of their proxy statements. In 70's and even the 80's the compensation of the CEO seemed to be mostly a matter arrived at between the board and the CEO that resulted from discussions and negotiations and the public disclosure was a matter of a few pages. But there was then nothing like the pressure to conform to best practices backed up by the reliance upon the advice of consultants and the concommitant availability of market data that there is today.

You can guess how it works. No board that isn't about to fire its CEO really wants to admit that their CEO is a less-than-average performer by paying him or her less than average. But if the lowest-paid CEO's are always being brought up to the average, then the average increases every year. Then for the high performers to be paid well, their compensation needs to be increased, but that raises the average - and so on every year. And the compensation committee and the board always have this market data before them, the recommendations of their consultants and "best practices" to adhere to. These influences are not easily resisted. You see the result.

Like many regulatory unintended consequences, it's hard for me to see an easy way back. But it's more than an academic question if you are a director serving on a compensation committee.

All these things may be obvious to you, but the influence of disclosure and corporate governance didn't make the book, so I hope you don't mind my writing this long email."
Khaos_Mage
Posts: 23,214
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4/29/2015 1:53:32 PM
Posted: 1 year ago
According to this, the average CEO makes in the low six figures.
http://www.payscale.com...

It bothers me that people think all CEOs make millions, which is only the big multinational, public companies (maybe private ones, too).
It's like saying the worst NBA player makes anywhere near as much as Michael Jordan did.
My work here is, finally, done.
xus00HAY
Posts: 1,382
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4/29/2015 11:26:23 PM
Posted: 1 year ago
Its like those free agent baseball players. Some of them are paid millions of dollars a year, do they really earn it?
On TV I have seen some of these millionaire pitchers "at Work". If it is not one of the 5 days a week they have a day off, he will throw a few balls, but half the time he is in the dugout sitting on his a$$ watching a ball game. After the 6th inning he tells the manager that he is tired, go find some other guy to throw that ball!
What happened? He was considered to be a way the team owner could buy victories. When every other team in the league wants to hire you, they have to compete with each other. So $4 million does not seem to be a lot of money when another team's offer is $5 million.
So , If you are the president of a company that was bankrupt when you joined, and there was a turn-around while you were in charge, so now their stock is worth 3 times as much. YOU are in demand!
A free-agent executive may not do 300 times as much work as the janitor, but they wanted a guy who is better than that other company's boss, and they made a higher bid.
There was a pretty good man who was the CEO of Grumman aircraft. Compared to the salary of his workers the ratio seemed reasonable. The Air Force was choosing which company would build the next generation fighter jet. The Generals wanted a plane that could take off vertically (like a helicopter) The Grumman design team guessed that these Generals would change their mind when it became apparent that there was no way you could build a supersonic fighter that could do that. They built a conventional prototype that was guaranteed to kick any other airplane's a$$, but it needed a runway, but hey, the air force has plenty of those. They guessed wrong. After a competitor got the trillion dollar contract, Grumman had to close their factory.
Maybe if Grumman had a CEO who could get things done right, they would have to pay him another million, but Long Island would still have it's largest employer.
Wylted
Posts: 21,167
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4/30/2015 3:38:40 AM
Posted: 1 year ago
Some CEOs take $1 a year salaries and only make money if the business makes money.

As far as the high salaries are concerned, the talent pool for CEOs isn't very deep. Very few people can do the job well, so if companies want quality, they have to shell out serious cash.
Diqiucun_Cunmin
Posts: 2,710
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4/30/2015 10:55:10 AM
Posted: 1 year ago
At 4/29/2015 1:53:32 PM, Khaos_Mage wrote:
According to this, the average CEO makes in the low six figures.
http://www.payscale.com...

It bothers me that people think all CEOs make millions, which is only the big multinational, public companies (maybe private ones, too).
It's like saying the worst NBA player makes anywhere near as much as Michael Jordan did.

Unless the policy in the US is different, private companies don't have to disclose financial accounts, and are thus not affected by what the OP mentioned.
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xus00HAY
Posts: 1,382
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4/30/2015 6:04:00 PM
Posted: 1 year ago
A CEO may only earn that much in your country, but things are different here in America.
In America a company earns a profit or it's CEO should be fired.
We believe that the key to success is lay off as many of your overpaid, overweight, lazy American employees as you can.
If you can out source the work they do, it can be done by foreigners. Some of them earn so little that if they became a slave, that would be a step up.
If he plays his cards right, the money that those employees will not be paid will go into his Christmas bonus!
Ore_Ele
Posts: 25,980
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4/30/2015 6:28:22 PM
Posted: 1 year ago
At 4/30/2015 6:04:00 PM, xus00HAY wrote:
A CEO may only earn that much in your country, but things are different here in America.
In America a company earns a profit or it's CEO should be fired.
We believe that the key to success is lay off as many of your overpaid, overweight, lazy American employees as you can.
If you can out source the work they do, it can be done by foreigners. Some of them earn so little that if they became a slave, that would be a step up.
If he plays his cards right, the money that those employees will not be paid will go into his Christmas bonus!

This represents such a small portion of CEOs, yet broad brushes it across them all, that it hurts.
"Wanting Red Rhino Pill to have gender"
Kaynes
Posts: 25
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5/1/2015 12:36:09 AM
Posted: 1 year ago
Why don't we talk about these soccer players who make like 80 millions/year playing a game ?
xus00HAY
Posts: 1,382
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5/1/2015 5:34:04 AM
Posted: 1 year ago
Because we are not familiar with soccer. We don't watch it on TV, unless someone else has selected that channel and we say " why doesn't somebody just pick up the ball?"
xus00HAY
Posts: 1,382
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5/1/2015 5:43:04 AM
Posted: 1 year ago
I am sorry if it is not accurate to say that all CEOs make this much money.
A CEO of a small or smaller medium sized company does not get this much.
However, its still way more than we are paid, and when someone has so much more than we do, we can't help but resent it.