This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
2/16/2007
Fed's Call for CEO Pay Cuts
I recently read an article in USA Today, that contained several excerpts from a speech that was given by the New York Federal Reserve President, William McDonough. In his speech, he accused executives as having bloated salaries and that they were grossly overpaid. In addition, he said that their large salaries are difficult to justify. I totally agree with him! Many CEO’s are receiving salaries that far beyond what they deserve. For example, Richard Fairbank is the CEO of Capital One Financial, he is reported to have 5-year compensation package worth $448.58 million. His salary is absurd! While I think the idea of, “getting what you pay for,” may be true in some circumstances, I do not believe it is true with many of the over paid CEO’s. Perhaps a better way of paying a CEO would be to base his/her salary on performance, with bonuses and incentives for increasing revenue, decreasing costs, etc… I am curious about what you think about this topic.
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7 comments:
I agree that CEO's are overpaid, and I express my opinion quite often about this. I know that in Baseball, some players are payed a base salary with incentives based on performance. It seems to work well with them, to keep them motivated to perform. If CEO's were to have the base salary plus incentives, I think their base should be at $100,000 with whatever incentives the company wants to give them (Warren Buffett has a salary of $100,000). This would give a decent salary to support CEO's while keeping them on the ball to make more money. I think this would be a great idea.
The pay for a CEO is something difficult to determine. The CEO could be responsible for the turn around of a company and because of that has helped the economy grow and society be better. Should they not be compensated for such a great accomplishment? I think they should. On the other hand there are the CEO's that have a golden parachute and don't perform very well. The board can't get rid of them because it will cost them too much in the golden parachute. There needs to be a way to develop a way to compensate the CEO's for what they do. Maybe the board could have some regulatory committe that could find a plausible way to measure performance. I don't know if I like the base pay idea. If there was a base pay it would have to be regional because 100,000 in some areas is not that much money for a CEO.
Does it offend our ethical standards when CEO's make so much money? Or, is the public offended because we feel that CEO's are taking too much, and not giving enough back? Or are we just plain jealous? Even if CEO's were paid on a performance based scale, many of them would still have astronomical salaries in stock options alone. Do you suggest that performance based pay only be paid in options? Or do you think bonuses are the best way? Many executives know how to fudge numbers to show performance when the company actually didn't meet the stockholder expectations.
So if it's ethics we are talking about, then some CEO's have found a way to be paid regardless of actual performance. Besides isn't it ultimately up to the board of a company to pay a CEO what they feel he/she deserves. I think there would be very few of us who would turn down astronomical salaries if they were offered to us. How much of this argument is because of our envy and how much stems from the CEO's greed?
Good Call Aaliyah. I don't think HOW CEO's are compensated is important, whether it be options or money, but at least it would be a driving force. I'm not going to lie, I would love that much money. The thing that makes me mad though is all of the CEO's who make all this money...and yet they still fudge the numbers to get even more. I guess my assumption is that most CEO's are lying, so why pay them more?
I agree with Isabelle - what gets met the most is that there doesn't seem to be a way to buy the honesty of some of these people.
But ... they are not in the majority. They just make the news.
Most CEO pay is actually composed of a small salary, and a huge amount of performance based bonuses - typically a much lower rate of base pay than a professional athlete. So, we've already got what you folks seem to think is necessary.
As to golden parachutes, it is also standard to backload compensation for most levels of employees, so why not CEOs?
Here's another thought exercise for you. Can you name a company that has succeeded by systematically limiting CEO pay? If not, then there probably isn't much basis (other than envy) for wanting to lower their pay.
P.S. McDonough is the former (and gone quite a long time now) president of the Federal Reserve Bank of New York.
Dr. Tufte said:
"Here's another thought exercise for you. Can you name a company that has succeeded by systematically limiting CEO pay? If not, then there probably isn't much basis (other than envy) for wanting to lower their pay."
I remember when Ben & Jerry's tried to limit CEO pay to a somewhat average salary--somewhere around $200,000. Ben & Jerry's found that with that salary the CEO underperformed to a great degree. Sometimes, you just have to pay big bucks for talent and/or dedicated service.
According to me CEO pays are not determined by performance alone, unless the performance is absolutely worthless. It seems a CEO is paid just for staying around with the company. The CEO pay should be based more on EPS, market-share and ROIC which these chiefs have considerable influence on.
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