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.

1 comment:

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Having said that, there are some slimeballs out there, and this is one of the few times that Galbraith's outdated quips still holds water.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