Are CEOs paid too much?

[August]

http://blogs.hbr.org/2014/09/ceos-get-paid-too-much-according-to-pretty-much-everyone-in-the-world/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+harvardbusiness+%28HBR.org%29

 

This article from Harvard Business Review was posted to Reddit and the comments there, below the article, and the article itself mostly say: Yes, CEO's are paid too much.

 

Now, I know one can argue that if the government didn't meddle with the economy, the pay disparity wouldn't be like this. However, what really irritates me about this whole thing is that it seems like the pay of the CEO should be between the company and the CEO. Why do these people think they can decide what other people get paid? I get the feeling that they want socialist laws in place to cap the salaries of others, which seems downright draconian. If not laws, then they want to make it extremely socially unacceptable to have a high salary.

 

I get the sense that what's really going on here is that these people, who are calling CEOs greedy, are really just greedy and selfish themselves and they want what another person has.

 

Am I wrong here? Also, isn't capping salaries going decrease incentive for someone to take the leading role in a company? Starting a business from nothing is an unbelievable amount of work and stress. Most people go through that stress because of the possibility of a huge payout. If we start cutting these incentives, then why would anyone want to start a business or company?

 

[shirgall]

There's a lot of competition to get a good CEO and the right CEO for your organization. The really good ones get paid a lot because they can demand it. If an organization could pay less and get as good work, they would. If it doesn't get the best price it can, the stockholders will sue the board for breach of fiduciary responsibility.

 

Everyone decries well-paid CEOs, but darn it the good ones make far more money for their companies than they cost.

 

Obligatory disclosure: I've worked for CEOs in the past.

[Psychophant]

If they are paid voluntarily they aren´t paid to much, cuz a voluntary business transaction is benefitial to both parties otherwise it wouldn´t take place.

[dsayers]

I get the sense that what's really going on here is that these people, who are calling CEOs greedy, are really just greedy and selfish themselves and they want what another person has.

 

Fantastic point!

 

And yes, any financial transaction that doesn't violate property rights is the business of the two parties involved only. Abused children grow up to be adults, in a climate of State buying their affection, which leads to severe entitlement. "I see somebody else has more than me so instead of the anxiety I experience regarding that motivating me to increase my human capital, I'm going to try and get my hands on the big gun in the room and point it at them so I can take some of it for myself." They're literally behaving as thieves mugging those who earn their living by providing value to others.

[JeanPaul]

The really good ones get paid a lot because they can demand it.

Are you sure they are that good? Are you sre that in the libertarian world, it is the same ones who would be running large coporations?

[dsayers]

Are you sure they are that good?

 

YOU are, unless you're saying that you would pay more for something than you have to.

 

I don't understand your follow up question. Corporations are fictitious entities created by the State. To ask who would run them in the absence of a State doesn't compute.

[Josh F]

The CEO's prices are way too high!  This is a byproduct of regulatory capture, which allows businesses to squeeze out competition.  Their extremely high pay in many of these large industries has much more to do with the rotating door policies between government and CEOs.  CEOs and "consultants" are often receiving backpay for the work they did while inside the government, setting favorable regulations.  Its bribery.  

[andkon]

Napkin math: (CEO pay) / (# of employees) / 12 = $ per employee per monthOracle's Larry Ellison has often been criticized for high CEO compensation: $67.4M / 122,458 / 12 = $45.86

 

Wal-Mart has often been criticized for being Satan incarnate: $25.6M / 2,200,000 / 12 = $0.96 

Wells Fargo has often been criticized for being a bank: $19.3M / 264,900 / 12 = $6.07

 

CEO pay then is much ado about nothing.

[Josh F]

I'm curious, I dont know if I understand that, can you go into more detail?

[August]

The CEO's prices are way too high!  This is a byproduct of regulatory capture, which allows businesses to squeeze out competition.  Their extremely high pay in many of these large industries has much more to do with the rotating door policies between government and CEOs.  CEOs and "consultants" are often receiving backpay for the work they did while inside the government, setting favorable regulations.  Its bribery.  

 

All of that may be true, but your first statement is really just an opinion unless you can explain "too high" objectively. 

[Josh F]

"too high" as in it is a byproduct of violence.  That it would be less in a free market.

[nathanm]

Putting aside factors of government involvement and the like, I notice this question of CEO pay never goes the other way.  Nobody in the middle ever wonders if they are "unjustly" making more money than the guy who comes in and empties the trash and sweeps the floors.  It's only ever whining about the guy at the top whose job category is something you've never trained for anyway.

[andkon]

I'm curious, I dont know if I understand that, can you go into more detail?

 

Sure. The premise is that CEO pay takes money from workers. Putting aside that wages for workers and CEOs are determined by supply/demand, if we were to take the CEO's pay, how much would each worker receive? If a CEO makes $10M per year and there are 100,000 workers then each worker would receive (10,000,000 / 100,000 =) $100 each. Divide that by 12 months, and you get $8.33 per month per worker. So if we took the CEO's pay and gave it to the workers, it's just a few dollars. Workers wouldn't be much better off.

[Josh F]

Sure. The premise is that CEO pay takes money from workers. Putting aside that wages for workers and CEOs are determined by supply/demand, if we were to take the CEO's pay, how much would each worker receive? If a CEO makes $10M per year and there are 100,000 workers then each worker would receive (10,000,000 / 100,000 =) $100 each. Divide that by 12 months, and you get $8.33 per month per worker. So if we took the CEO's pay and gave it to the workers, it's just a few dollars. Workers wouldn't be much better off.

ahhhhh got it, excellent point!!

[Brentb]

It's like asking: do koala bears eat too much? If you're not a koala, and you're not feeding them, then it's none of your business.

 

If you're not paying a CEO, and you're not a CEO, then it's none of your business. Like you said - it's just jealousy and greed on the part of the gossips.

[Anuojat]

Younger sibling: "My brother got a car! I want a car too! (cause cars are cool and all because my brother and other older sibling and older people wants one!)"

 

In other words: "I dunno what CEO even does, but what i do see is that large number over there!"

 

or

 

"Wow look at all that WASTED money on one person instead of giving it to US all."

[Pepin]

To give a market based reply:

 

The function of a CEO is to earn the business more money than without a CEO. The salary of the CEO is of course accounted for in this formulation. This does not mean that a CEO will necessarily cause an increase in profit, as they may have no effect or have a negative effect, but a CEO who has a positive effect on the business is one who generates higher amounts of profit.

 

If a business is running at a loss, it is more likely for workers to lose their jobs than to receive a higher compensation. A business whose revenue exactly matches its expenditures will not be capable of giving raises as there are no additional funds. Therefore, the wage of a worker is correlated with the amount of profit the business generates.

 

A CEO's salary is based on the increase in profit they generate. A CEO who makes a large amount of money is one who creates a large profit within the business. As an example, a CEO who generates an additional 100 million dollars in revenue may be paid 5 million dollars, which leaves 95 million to be invested in the company resulting in wage increases and further hirings.

 

The comparison to make is not between a business which generates an additional 95 million dollars with a CEO and a business without, rather it is between a business that generates an additional 95 million dollars with a CEO and 0 additional dollars without.

 

The assumption in the argument is that the CEO can be attributed with the allotted profit. A likely retort is that CEOs do not add value a business, which can be contested by repeating the assumption made in the argument, that the profit can be attributed to the CEO. In the real world, there are many methods of measuring CEO performance, which makes this more than a theory.

 

With that said, there are few market dynamics at play at the present time.

[tasmlab]

A little lost here is how CEOs are paid.  Their base salaries are often not that big (sure, way bigger than most folks, but not the bat shit numbers they end up with)

 

Most get equity and make massive chunks from selling their privileged shares/options of the company on the stock market.  The super-charged stock market, which itself is propelled with the average Joe being forced into it with 401Ks and having to beat inflation, means that much of their money is made not from the profit margins of the company but from the public.  If one is skeptical about the role of governments and our financial cartel, I would say that there is something a little sinister and unjust about CEO compensation.

 

A company could feasibly keep stock options and keep them as margin, but the CEO is an agent of the board and the shareholders, and giving him/her stock is both without risk and a great motivator to keep share prices going up.

 

The lefty ire towards CEO compensation is misplaced to be sure.  We should WANT successful CEOs to be very well paid.  I think if you got rid of the government, had private money, and right-sized the stock market, compensation would be a fraction of what it is today.

 

(Armchair speculation from stranger on the internet)

[Josh F]

In a free market, it would certainly be much less than they're paid today, because the businesses which afford them those huge salaries would no longer have regulatory exemptions and would instead be facing much stiffer competition.  Its easy to see how, for example, Dick Cheney would be worth far less as a Halliburton CEO if couldn't guarantee billions of dollars in contracts through Washington lobbies of stolen tax payer funds.  

[Alan C.]

Having worked in IT for nearly two decades, I can tell you that some CEOs are paid too much and others are paid fairly. I've seen my share of inept, buffoonish CEOs who were paid lavishly and didn't deserve it. I've also known CEOs who were extremely astute, affable, perceptive, and practical.

[LovePrevails]

If they are, the best way to stop them getting overpaid is to reform the statist education system so poor people have the training and skills to outcompete them.

[J-William]

Given the ridiculous flows of money made possible by the fed and "quantitative easing" many CEOs are making their companies wealthy through knowing the right people in government.

 

But even "good" CEOs must be aware of how the government affects their company and respond to it... Which means that there will never be a clear line between those that deserve what they are paid and those that are mooching off the government.

 

You could certainly spend your time researching CEOs and figuring which were most bad, but at the end I the day you'd be wasting your time on things that don't really matter.

[Josh F]

Right.  If the issue is the disparity between wealth and poverty, then there are good arguments that under a free market there would be much less disparity.  Ideally we'll all be millionaires with robots servants! lol

[Pepin]

There is reason to think that a large factor in the increase in CEO pay is that new money goes to large corporations first. This provides an advantage to the corporation not just in terms of in money, but also in the use of the money prior to its effect on the market.

 

The large growth may simply be the effect of an overly inflated money supply concentrated in these large corporations. The measured disparity may be simply one of inflation. To put it this way, once the effect of the inflation is distributed across the market, the money which these corporations hold decreases quite sharply. One million units of money may have seemed like a lot prior to inflation, but soon one million units becomes a rather modest sum for a corporation to possess.

 

Provided I am not talking out of my ass, this may mean that slowing down the release of the money is most beneficial to the banks, as the inflated benefits last longer, which may be the reason for the incentives given by the fed to not loan out money. It is a dual issue of not wanting inflation to hit the public, and another of creating a cartel.

 

Eh, I don't know.

[shirgall]

The "stimulus" and "Quantitative Easing" stuff does go to those who are best at government schmoozing first, that's true. It "trickles down" a lot less fairly than the free market.