Chief Executives

[Walsingham]

http://www.telegraph.co.uk/news/uknews/roy...age-strike.html

 

This brought back a thought I keep having: What precise benefit is had from an organisation paying their CEO

[Wrath of Dagon]

http://en.wikipedia.org/wiki/Mark_hurd

[Enoch]

Ultimately, every large organization needs someone at the top, who gets to (has to?) make the calls on the most difficult and important decisions that the organization faces. Regardless of that person's skills, that position involves a lot of reputational risk. In the private sector, high risk means high salary. And when those tough decisions turn out quite well, that salary looks justified. (Even if all they were doing is taking the advice of brilliant subordinates.)

 

That said, executive pay among huge firms is one of those areas where the behavioral economists' arguments are far more convincing than those of the traditional 'compensation based on free market competition and value-added' economists. Specifically, executive pay between huge competing firms leads to an 'over signaling' bidding war: Companies try to signal to markets that their business is strong by publicly paying their executives a lot of money; competitors react in kind; before long you have lots of execs making lots more than they should based on the value they add to the company; and no company can bid down their compensation package without creating the public perception that the firm is in trouble. Combine that with the fact that the decision-makers involved are all in the boardroom, among people who, for the most part, have been or want to be big company execs themselves, and the countervailing downward pressure on compensation tends not to emerge.

Edited October 23, 2009 by Enoch

[Humodour]

http://www.telegraph.co.uk/news/uknews/roy...age-strike.html

 

This brought back a thought I keep having: What precise benefit is had from an organisation paying their CEO

[Walsingham]

Ultimately, every large organization needs someone at the top, who gets to (has to?) make the calls on the most difficult and important decisions that the organization faces. Regardless of that person's skills, that position involves a lot of reputational risk. In the private sector, high risk means high salary. And when those tough decisions turn out quite well, that salary looks justified. (Even if all they were doing is taking the advice of brilliant subordinates.)

 

That said, executive pay among huge firms is one of those areas where the behavioral economists' arguments are far more convincing than those of the traditional 'compensation based on free market competition and value-added' economists. Specifically, executive pay between huge competing firms leads to an 'over signaling' bidding war: Companies try to signal to markets that their business is strong by publicly paying their executives a lot of money; competitors react in kind; before long you have lots of execs making lots more than they should based on the value they add to the company; and no company can bid down their compensation package without creating the public perception that the firm is in trouble. Combine that with the fact that the decision-makers involved are all in the boardroom, among people who, for the most part, have been or want to be big company execs themselves, and the countervailing downward pressure on compensation tends not to emerge.

 

Good explanation. Thanks.

 

The only issue I'd have with that is that they don't actually run any risk. It's not as if they get fired if things go badly, or miss out on their pensions. I cincede one must avoid bad CEOs, but I simply don't see the commensurate improvment from a 200k CEO to a 200million CEO.

[Hurlshort]

Steve Jobs pays for himself and quite a bit more, but I never understood how companies with huge losses justify million dollar salaries. THe CEO should make janitor pay until the company gets out of the red.

[Walsingham]

I can understand someone getting paid big bucks to set a company straight, but simply running a company seems a sinecure. Like being a Field Marshal without an enemy.

 

One step at a time: what does the CEO actually DO?

[Aristes]

I don't think it's always so cut and dried as a simple solution. To some degree, good leadership can pay for itself, even if a lot of folks say that it what they did was take simple steps that anyone could have devised. The fact is, the credit goes to the guy on top, and some times his leadership made all the difference. On the other hand, I do think that the corporate mentality plays into things.

 

On a different note, I think the Obama administration is perfectly within its rights to lower the salaries and bonuses of companies that have significant public investment keeping them afloat. Now, I will say that the rotten bastards might use this as an excuse to regulate pay for other private companies, with which I completely disagree, but these particular companies are fair game.

 

Personally, I think that, the recent and ongoing crisis withstanding, companies that pay out exorbitant sums to their CEOs should simply be allowed to fail if they overreach. I don't agree with government intervention in salaries because, idiots mocking the slippery slope and all, the government takes every inch it gets and runs a country mile with it. On top of that, large scale wage and price controls tends not to work very well over the long haul in a free market system.

[Walsingham]

If the government is a big shareholder then why shouldn't it exercise shareholder's rights?

 

Anyway, leaving that aside, what are the measures a CEO should be judged on?

 

1. Market performance

Too many auxiliary factors to get a clear message

2. Not committing fraud

Fraud kills entire companies. Fraud is a definite no. Hence...

3. Integrity

Hence...

4. Accepting responsibility

5. Not killing babies for fun

6. Looking cool

 

I don't know...

[Calax]

Meh, I personally would tie a CEO and the Executive groups salaries into how the company (or the exec's particular group if that group isn't designed for making money, like Aerojets environmental remediation team) is doing. If it's doing badly, they get a significant pay cut as part of cutting costs, if it's doing well they earn the millions of dollars that we see today. But just hiring somebody and giving them money only to watch them drive the company into non-existance because they're idiots is not a good strategy.

[Aristes]

Fraud is a different story, though. If the CEO or board of directors or other folks in positions of responsibility step outside the law, then bonuses should be the least of their worries. Prison should loom largely in their minds. As part of their punishment, they could possible forfeit their bonuses, but certanly breaking the law could carry a variety of punishments.

[Guard Dog]

On a different note, I think the Obama administration is perfectly within its rights to lower the salaries and bonuses of companies that have significant public investment keeping them afloat. Now, I will say that the rotten bastards might use this as an excuse to regulate pay for other private companies, with which I completely disagree, but these particular companies are fair game.

 

I am very uncomfortable with that whole idea. Obama has absolutely no constitutional power to regulate the pay of anyone not working for the government. This was one of the reasons I was so adamantly opposed to any private company being "taken over" by the government because it suddenlt means the government is no longer the neutral referee bound to abide by it's own laws but a business partner granted extraconstitutional powers over a private entity simply by the nature of it's investment in said company.

 

So, these companies shook hands with the devil accepting bailout money and it's no surprise that when you do that you will do it in hell. But the Obama admin is arrogant in the exteme and might well use the fact that they are going to get away with this to push for more regulation, this time on companies and individuals that did not accept government "partnership". When that happens it will be time to fight. With speech, legislation, and ballots of course. While in the Illinois Senate Obama was in favor of a maximum as well as minimum wage. He may want to try to make it happen now.

 

Suddenly Ayn Rand is making more and more sense.

[Walsingham]

I agree with Lewis Black. If you are on a multi-million pound salary, and you steal from people you shouldn't be sent to some white collar jail. You should be sent to the nuthouse. Because you're clinically insane.

[Enoch]

Obama has absolutely no constitutional power to regulate the pay of anyone not working for the government.

Well, sure, he doesn't. He needs Congress to passe a statute in regulation of interstate commerce that delegates said power to the executive first.

 

 

The big idea now is in making executive bonuses sensitive to the longer-term success of the company, e.g., via stock options that can't be exercised until a designated number of years has passed.

[Gorth]

I am very uncomfortable with that whole idea. Obama has absolutely no constitutional power to regulate the pay of anyone not working for the government.

Disclaimer: I only know fragments of the stories and events, not the big picture, I might ask silly questions.

 

Would it really be unconstitutional to offer bail out packages with strings attached on exactly what the offered money can be spend on? I.e. can be used for investment, cash flow etc. but not for bonuses or salary payment beyond a certain cap?

 

If my tax money was used to pay somebodys private jet for his great job of mismanaging myself out of a job (and possibly my home), I would be outraged beyond description.

 

If those corporate fat cats are truly worth their pay, they should be to be compensated on future results if they manage to turn their companies around.

 

Or would you rather turn all Ayn Randsque on everything and let each and every financial institution and car maker (or whoever was hard hit) crash and burn?

 

[Humodour]

All I really care about in this issue is Australian companies, and here the problem seems smaller:

 

The institute's submission to the Productivity Commission noted that executive pay [is] not such a hot issue in Australia as it was in the US and parts of Europe.

 

It quoted remuneration specialist John Egan, who noted that while 90 per cent of Australia's top 50 company chief executives had base pay above $1 million, that dropped to 60 per cent in companies ranked between 51 and 100, and less than 20 per cent in companies ranked between 100 and 200.

 

Outside the top 200 and down to 400, the percentage dropped to about 5 per cent, Mr Egan said.

[Walsingham]

And yet mysetriously you are the only major economy not to have gone into recession. Could this be because Aussie investors aren't schmucks?