If a CEO messes up, you pay for it. (I’m assuming that you 1) Own the stock or 2) Live in America). Given that average Fortune 500 CEO compensation is over 10 million, it doesn’t seem unreasonable to demand that the CEO add value.
Let’s look at the big questions…
Why are CEO’s paid so much?
- CEO pay is historically astounding. CEOs were paid 20x what a worker was paid in 1965, but that number is now 300x. Have CEOs gotten fifteen times smarter?
- The stated goal is to pay for performance, but in that case, what are golden parachutes for?
- Ultimately CEOs are paid stratospheric amounts because boards hope that will help company performance.
- Compensation is based on industry averages, and most companies want to demonstrate they are above average. This means endless CEO raises.
Are CEOs worth that much?
- Is the $10 million a year guy twice as good as the $5 million a year guy? The cheaper guy will likely be humbler, more effective, work harder, and succeed better than the $10 million guy who thinks his every decision must be great.
- Making the cover of Fortune magazine costs a company in ill-thought-out mergers and acquisitions.
- Watch out CEOs! The academics are starting to add up the numbers to answer that question.
Does hyper-pay help the stockholder?
- No. The incentive structure is perverse. It rewards the CEO for a bump in stock price ignoring what the rest of the market is doing and valuing temporary bumps over your stockholder earnings.
- We don’t have a good grasp of how to incentivize people. See Dan Ariely’s Predictably Irrational.
Who can we blame?
- Corporate Boards – they are compensation increasing machines. In 2012, CEOs got 16% more than the prior year, with the average worker getting 3% more.
- Congress – they have been very slow to adopt rules requiring companies to make CEO compensation understandable.
- Mutual Funds – they control a large number of shares and have a corresponding voice, if they would use it, which they don’t. Jack Bogle points out that this is a failure by the Mutual Funds to do their duty to protect their shareholders.
- Us – Unfortunately we are ultimately in charge of all of the above culprits. It’s much like our irritation at politicians promising the moon and never delivering. The ultimate question is why we vote for people whose promises aren’t credible. On the plus side, we can fix this.
