Are CEOs Over Paid?
From 2000 to 2010, the boards of S&P 500 companies — the largest publicly traded U.S. corporations — decreased the average amount they awarded their CEOs by 46 percent. Over the same period, average pay converged with median pay, which stayed roughly flat — up 8 percent from 2000, but down 7 percent from 2001. (These figures represent estimated pay, which includes the hypothetical value of the stock options issued to the CEOs at the time they were granted. In other words, they measure how much a board intended to compensate its chief executive.) The story is similar outside the S&P 500. Average CEO pay among more than 1,000 smaller public companies also increased in the 1990s and declined in the decade afterward, likewise falling closer in line with median pay.
From the Dallas Morning News.
While I understand your point, this tells us nothing about if they are overpaid. All we know from this is that CEOs are being paid less than they used to.
Whether a CEO (or any worker) is overpaid is a function of the supply and demand for their services; and the transparency of that information to the people who make decisions about employee compensation.
I read an journal article many years ago that argued executive compensation committees were very generous when composed of fellow executives working their way to the top. Presumably it’s in fellow executives’ self-interest to perpetuate excessive pay. However, when the executive compensation committee was composed of executives with inherited wealth, they were perceived to be less generous.
I don’t have strong opinions about whether CEOs are overpaid other than pay needs to be a function of shareholder sentiments and shareholder value. CEOs are paid to see the big picture and steer the company accordingly. I’ve heard it said that a CEO only makes one or two important decisions every year — those of strategic value.
I completely agree. CEO wages need to stay market coordinated.
Mind you, there is “implicit pay” for these CEO’s, to go along with the transparent executive compensation.
Read the article a year ago which stated that CEO’s that had strong political connections were much more likely to receive a government backstop (assistance in the case of collapse; looking at recently provides examples of these) than those who didn’t, meaning that these CEO’s jobs are “safer” (and the expected value from it will be higher).
The paper also stated that the performance, after being bailed out, of these firms with strong connections was worse than firms who were bailed out without the strong connections.
Problems of causality notwithstanding, executive pay is also criticized because of the ties created between politicians and the CEO’s, perhaps distorting incentives, pay, and the atmosphere surrounding what they do.
It’s not an easy question, actually.
Beyond this question has been the question of whether CEO pay is tied more to short-term performance instead of longer-term performance (sounds familiar to politics, eh?), distorting incentives and actually leading to problems in the future.
There has been empirical and anecdotal evidence on this fact, and it does seem like they are rewarded by maximizing some value (revenue stream, pure profit, shareholder dividends, stock value, …) quickly, instead of positioning the company for the long-term.
Shareholders ought to have more resources to voice concerns if they feel their CEO is being paid too much. A social opinion shift on this could affect shareholder’s views and eventually cause CEO salaries/compensation to go down. My personal opinion is that plenty of them out there are overpaid for their type of leadership that isn’t indispensable, but that’s something the company itself has to address.
I don’t have any problem with the amount of money that CEOs are paid.
^Agreed. If the market value is high, then they should be paid a lot.
Not if the company’s shareholders don’t agree.
Usually the board members vote on these salaries. Board members usually are majority share holders.. Operating the company to INCREASE profits so that the value of the company is increasing continually.
Right…so the point is it’s up to them…increasing CEO compensation doesn’t necessarily correlate with profit maximization for the company.
In the case of setting precedent for ambitious board members without inherited wealth, no it doesn’t necessarily coordinate. Majority shareholders would decrease CEO pay and roll them back into the company in order to increase stocks fractionally. So yes, it does coordinate.
Are star athletes overpaid? How about star entertainers? College presidents? Tenured economics professors?
Tenure is an abomination.
Is it possible that we need someone at the top?
I think the concern is (or should be) whether executive pay is a function of a transparent job market, or is it a result of cronyism and information asymmetry. I would have the same concern about college presidents and unionized public employees.
I’ve never heard of star athletes or entertainers having that kind of influence over corporate boards, and it tends to be easier to know whether their value at the box office is in line with their pay.
This is the economists take, “Executive pay levels rise because of globalization, not poor oversight.”
http://www.economist.com/node/21542802
If you read the article you’d see that is a specifically British phenomena.
“The average S&P 500 wage for chief executives is now $10 million. British bosses may simply have been catching up with their American counterparts; the strong upward trend in their pay may not continue.”