3/21/2005

Overpaid and Underworked

Recently, I read an article entitled "Captains of Piracy". The article is a good read and I have to say that I agree with the author. America's CEO's are definately compensated much more than they certainly earn. My problem with the compensation issue is why can't those excess profits be shared among the owner's of the corporation, the shareholders. The most awful part about all this is that even when companies were going under, or even just reporting losses for the period the almighty CEO received a large bonus. The article mentions some good examples. Disney's Michael Eisner, and Hewlett Packard's Carly Fiorina. Both of these individuals were rewarded with healthy sums of money when neither deserved it nor earned it.

"As John Kenneth Galbraith once put it: "The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself."

Some may argue that CEO's have top be paid large amounts of money and receive huge bonuses, in order to keep good talent around. I hope they are trying to keep GREAT talent, but the problm is they aren't. When a CEO has earned his due he should be rewarded, but in my opinion he should earn it. That means he must work just as hard and longer if need be than any other employee to earn his reward. Just because he is the guy that calls all the shots doesn't make him so special that they no longer have to work hard for what they earn. I feel that if CEO's shared a little more of the pie with everyone else. Everone else would benefit, and higher levels could be reached by all.

8 comments:

Luise said...

I believe that CEO’s deserve the large salaries and bounses they get. This isn’t a personal attack on you, Drake, and I hope you don’t take it that way. But have you been a CEO of a big company? Have you talked to anyone that is a CEO of a big company or corporation?
I’m going to go with my guit feeling and say that you haven’t. I personally have a very close friend who is a CEO of a big real estate company in New York City. With all the traveling and long hours she puts in at work, she deserves every penny that she gets. Yes, it is more money then most of us here at SUU will ever make, but it doesn’t mean that people who work that hard and put in that much time shouldn’t make lots of money.
It does take “GREAT talent” to run a big corporation and make sure that it dosen’t fall on its face. I cannot imagine the stress that CEO’s face with their jobs. These people are faced with tough and complex decisions.

Keston said...

This was a very interesting article, post, and comment by Luise. Actually I agree with all of them in different ways. Like Luise said, I do believe CEO’s have a lot of stress and are very busy and most of them probably do deserve the wages they are getting paid. However, there are some who don’t. I also agree with what Drake said that if a company if failing or losing profit, that the CEO should take a pay cut and that more wealth should be distributed to the shareholders.

I remember listening to a speech by David Neeleman, CEO of JetBlue, who said that he only makes what he needs. It wasn’t a very large sum compared to other CEO’s, and look how well his company is doing. Maybe if some other CEO’s took Neeleman’s strategy, their companies wouldn’t fail either.

Harry said...

I would have to say that I think that there are those CEOs out there who do make more than they deserve. But there are also those that work hard and deserve every penny they get because of the stress that they are under. To me CEOs should make more than the other employees, because when the company is doing bad it reflects. CEOs should not make so much money that the risk of the company going under. That is when it is taken to far.

Diane said...

CEOs are extremely talented and must be compensated accordingly. Few people can lead a company. Anyone can be president of the U.S. but few are talented enough to be CEOs according to Steven Landsburg.

I do believe that many CEOs are overly compensated. The money should be redistributed throughout the company. It could be put into retained earnings to build company assets. It could be used to provide better health care for employees.

Lately many CEOs are being tried for white collar crimes that cost stockholders, the company, and the consumers millions of dollars. They should be prosecuted to the extent that criminals are. They are not different because they didn't kill anyone. Employees of Enron lost all their retirement. These employees weren't involved in the scandal yet because of the nature of a corporation they still have to pay for the crimes of overcompensated, evil CEOs and board members.

Dale said...

I know of a CEO that recently resigned, because he was not doing a good job leading the company. The CEO was in the leadership position for twelve years and things just were not getting done. Twelve years is a long time to be in office without showing any positive results.
Of course there are many examples of the good CEO’s that do deserve the money they get, if not more.

Tom said...

With the changing times, I think there needs a different type of management. Corporations these days are turning to a more bottom-up versus a top-bottom style of management. Tasks are being accomplished more by a group effort instead of top authority dictating what should be done. Recently an article came out talking about Google, and Google's top founders only pay themselves a six figure salary and share the profits with their employees. Everyone at Google gets the same amount for their Christmas bonus. This type of management style will prove to be the most productive in times to come. There is synergy effect when everyone gives input for tasks and creativity.

Dr. Tufte said...

-1 on Drake's post for a spelling error.

No offense to Drake, but I think that most discussions of how much CEO's were compensated would be helped if people wrote down a formula first of what they thought was appropriate that included some sort of compensation for earning profits for shareholders. When you actually ask people to do this (and I have done this in finance classes, and as sort of a party game) you find that most people would actually compensate CEO's more than they are in fact compensated!

Having said that, there are some slimeballs out there, and this is one of the few times that Galbraith's outdated quips still holds water.

Given all this, there is actually a literature in finance arguing that most management is a liability - that is costs the company more than it is worth. Certainly Carly Fiorina seems to fall into this category. (Interestingly, Fiorina came to HP out of top management at Lucent; a company that was almost put under by poorly managed principal-agent problems and an emphasis on sales rather than profit maximization).

In economics there is also a literature on tournaments. Basically, you can get a whole lot more work out of taleneted people at the lower levels of the tournament if they all hope that someday they will get to the top. But, in order for that to work, there has to be someone who visibly does get to the top, and does get that reward (even if they are not the most deserving). They are the incentive for everyone else.

One last note on what Tom said: what he is describing is a shift towards decentralized decision making. Haven't I said a few times that economics is largely about describing why decentralized decision making works?

Fred said...

Most of the time the salary of the CEO in great margins depends on how the firm is doing. Although there are cases of deceit and crime these people have either worked their way up the ladder for quite some time to reach that spot or are extremely good at what they do and have been hired from the outside. I think it should depend upon performance. What have they done to contribute to and augment the company's performance? If they have done their job and done it exceptionally well, then why would we seek to take away their bonuses and compensation benefits. If we are trying to make it more fair and equal we have to remember that these were also the underlying thoughts of the beginnings of socialism (which we know doesn't work).