The Arbitrariness of CEO Pay
The New York Times has a pretty fascinating feature on the highest paid CEOs in America that lets you sort the list in different ways. What’s most striking about it, to me, is that not only are these guys paid a ton, but there’s incredibly variation among them. These, for example, are the chiefs of three different companies with $60 billion in 2008 revenue:
Apparently Jeffrey Rein is 4.7 times the CEO that Steve Ballmer is. And Boeing has a CEO who’s a staggering 10.7 times more effective than the top executive at Microsoft. Considering that Microsoft is a pretty big, rich, and important company it seems fairly shocking that they would allow themselves to get along with such second-rate CEO talent. Meanwhile, Louis Gallois, CEO of Boening’s top competitor EADS (parent of Airbus, among other things), makes just 2.1 million euros. To be sure, that’s more than you get working for bargain-basement companies like Microsoft or Google, but given the genius and rationality of the free market it’s surprising that Airbus’ planes fly at all.
Joking aside, two clear patterns emerge in CEO pay. One is that American executives get paid wildly more than do European executives to run basically comparable firms. Look at executive pay in the supermajor oil firms and it’s clear that nationality rather than business acumen is driving the differentials. The other big issue is that CEOs of newish companies, especially tech companies, tend to have much lower salaries. The issue, presumably, is that these guys are major stockholders in the firm. Steve Balmer is one of the richest men in America notwithstanding his low pay since Microsoft is a successful company. But if he were to pull a John Thain and render his company worthless through business blunders, he’d tumble down the list.
It seems fairly clear that European and Silicon Valley norms are healthier than those prevailing elsewhere in the United States. There’s no sign that major European multinationals are crippled by an inability to attract competent executives—the norms are just different and the European CEOs are happy to work for “mere” millions rather than tens of millions. The Silicon Valley model, meanwhile, does let people become incredibly wealthy. But not through “heads I win, tales you lose” bets were bonuses are handed out regardless of performance or through rigged stock option plays. It seems to me that we could have a much healthier corporate America with more Steve Ballmers and more Louis Galloises and fewer Jeffrey Rein’s.
Meanwhile, a decent society will maintain a hefty tax on very large estates. That way we ensure that the Ballmers of the found are encouraged to leave behind generously financed foundations rather than the next generation of Paris Hiltons.
51 Responses to “The Arbitrariness of CEO Pay”
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April 6th, 2009 at 8:47 am
Simple solution for fixing CEO pay (in the US) here. Summary:
April 6th, 2009 at 8:57 am
For a really smart dude, you really need to revisit the Strunk & White grammar rules: http://www.bartleby.com/141/
April 6th, 2009 at 8:58 am
There is a difference between hired guns, like Mr. McNerney and entrepreneurs/company founders like Mr. Ballmer and his predecessor, Bill Gates.
April 6th, 2009 at 9:01 am
Please compare and contrast the CEOs of the “healthcare” companies with the 3 you cited. At least 1 makes airplanes, 1 makes software, and 1 runs a retail establishment where you can buy things. What amount of health services do most “healthcare” companies provide.
April 6th, 2009 at 9:01 am
Obviously we get all the best CEOs because taxes in other countries drive them here. That’s why businesses in the US are so sound today.
Maybe we should raise taxes.
April 6th, 2009 at 9:03 am
Gratuitous contrarianism: Even more commendable are those people who, unpaid, create software and give it away. Indeed, they rule the back office more than anyone admits.
April 6th, 2009 at 9:05 am
I think this is an example where companies where the founder(s) still has a large investment interest, they move to control the actual pay to CEO (and other executives) to make sure that most profits go to the investors (in this case Bill Gates and Steve Ballmer themselves and their old buddies from 30 years ago who help them found the company). The more passive the role of investors in governing the company, the less inhibition in bumping up upper management’s pay. Again, 80 years ago Adolph Berle, and 50 years ago John Kenneth Galbraith (see “The New Industrial State,” presented this case of actual division of interest between management and owners in the modern corporation. What I think would be a good new book is how management’s short term interests is actually destructive of the long term investors interests in the viability of the corporation. This would explain why so many corporations have collapsed the last 10 years.
April 6th, 2009 at 9:07 am
You spelled “where” wrong.
April 6th, 2009 at 9:11 am
How do “Silicon Valley norms” explain the comp for Oracle’s Larry Ellison? Or look at eBay or Sun Microsystems. Matt seems to have cherry picked Microsoft as the poster child for Silicon Valley (even though it’s in Redman, WA). But the variability in CEO pay is very interesting. I suspect there are probably structural/corporate governance type issues that help explain it better than a lazy reference to cultural norms.
April 6th, 2009 at 9:13 am
Ballmer’s pay is docked ten million dollars each year to pay for sweat cleanup. That dude throws off the liquid skank like no one else on earth.
April 6th, 2009 at 9:15 am
raivo pommer-www.google.ee
raimo1@hot.ee
DOWN WITH CAPITALISM
Die Isländer jagen ihre Regierung fort, die Franzosen nehmen Manager in Geiselhaft. Briten hauen in London auf den Putz. Und die Deutschen? Sie delegieren die eher kleineren Demonstrationen auf das klassische Protestpersonal aus Ökos, Antiglobalisten und Gewerkschaftern. Außerdem kaufen sie 1,2 Millionen subventionierte Autos. Das sieht aus wie eine ziemlich coole Art, mit der größten globalen Wirtschaftskrise seit 70 Jahren umzugehen. Aber wirkliche Coolness ist es nicht.
Denn eines steht außer Zweifel: Die Wut über die Bombenkrater des Finanzkapitalismus ist greifbar, groß und gerecht. Sie wird geteilt von den meisten gesellschaftlichen Gruppen und findet Widerhall im gesamten politischen Spektrum. Inzwischen. Deshalb klingen die Appelle der IG Metall, in denen grenzenlose Profitgier gegeißelt wird, nicht mehr anders als die Beiträge eines Volksbankenfunktionärs, der bei Maybrit Illner dem Gewinnstreben abschwört. Die CSU kommt inzwischen mit ihren Anti-Manager-Tiraden daher wie Attac im Trachtenanzug und gewinnt damit Popularität. Sonst würde sie ja nicht so reden.
April 6th, 2009 at 9:23 am
Also a good arguement for raising the marginal income tax rate for incomes over $5,000,000 a year to the 70% rate.
April 6th, 2009 at 9:24 am
Interesting topic. But why does this raivo dude keep posting his comments in German (I think)?
April 6th, 2009 at 9:26 am
Steve Ballmer owns billions in Microsoft stock. He doesn’t have to be compensated that well as he already has a pretty damn good reason to want the company to do well.
Mcnerney may not have that same setup.
Honestly, the whole CEO pay deal is a red herring issue. There are far better issues to spend time examining. Exchange-traded and private companies should have the ability to determine their executives’ pay themselves. If you don’t like their practices, don’t invest in them!
April 6th, 2009 at 9:30 am
очень интересно…
What’s most striking about it, to me, is that not only are these guys paid a ton, but there’s incredibly[...]…
April 6th, 2009 at 9:32 am
DTM,
I would be very eager to see this study if you have a link.
My vague recollection was that increases in CEO pay were largely uncorrelated with increases in profits.
April 6th, 2009 at 9:34 am
What is so arbitrary about CEO pay? This is a decision made by the owners and why should we (non-shareholders) care if they over/underpay for talent?
And if you are concerned about minority shareholders there are already plenty of legal remedies (e.g. derivative action) to ensure the majority works in its shareholders’ overall interests. You could argue these legal remedies are insufficient or are too costly and in need of reform but if the owners want to spend this money what is it to you?
Should every decision made between rational, independent actors be subject to Matt’s progressive sensibilities?
April 6th, 2009 at 9:38 am
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April 6th, 2009 at 9:38 am
The Russian spambot’s comments are “очень интересно” = “it is very interesting”
The German guys comments mean “The Icelanders hunt their government away, the Frenchmen take managers in captivity as a hostage. The British strike in London on the finery. And the Germans? They delegate the rather smaller demonstrations on the classical protest personnel from Ökos, anti-globalists and trade unionists. In addition they buy 1.2 million subsidized cars. That looks like a rather cool kind of going around with the largest global economic crisis for 70 years. But real Coolness is not it. Because one stands except doubts: Rage over the bomb craters of financial capitalism is seizablly, large and fair. It divided of most social groups and meets with response in the entire political spectrum. In the meantime. Therefore the appeals of the industrial union metal, in which boundless profit greed is gegeißelt, sound no longer differently than the contributions of a cooperative bank functionary, who swears off with Maybrit Illner that winning vines. The CSU comes along in the meantime with its anti- manager Tiraden like Attac in the Trachtenanzug and wins thereby popularity. Otherwise it would not talk in such a way.”
April 6th, 2009 at 9:40 am
> How do “Silicon Valley norms” explain the
> comp for Oracle’s Larry Ellison?
Oracle’s financial performance over the last 40 quarters, including the most recent one? The quality of (most of) Oracle’s product line?
April 6th, 2009 at 9:42 am
Not only are the remedies insufficient for minority shareholders, they are insufficient for majority coaliitions of shareholders. Many corporate boards have rules in place to keep themselves entrenched regardless of shareholder wishes. Often, the executives being overpaid sit on the board.
April 6th, 2009 at 9:44 am
Jimbo, the German guy’s comments can mean that, because that doesn’t mean anything,
April 6th, 2009 at 10:02 am
Don’t forget that a short while ago they were dinging CEO’s whose major compensation was stock options. The point? That these CEO’s make decisions to increase the short-term gains of their stocks, not the long term benefit of the company.
April 6th, 2009 at 10:03 am
It it any wonder that the Boeing CEO gets such lavish compensation? Boeing is a defense contractor which sucks at the Size D federal tit.
Same goes for the Big Oil CEOS — whose basic job is to bribe Congress and the WHite House into sending in the US military to grab overseas oil deposits and ensure that the little brown people write oil concessions that are “good for bidness”
You would expect such people to show RESTRAINT in their greed? Why?
April 6th, 2009 at 10:06 am
I think you made a cheap shot against Thain.
Merrill was worth significantly less than ZERO when he took over the company. We just didn’t know it at the time.
Thain realized his company was virtually dead and sold his company to Bank America for a fairly good price.
In retrospect, no one could have saved Merrill after Stan O’Neil killed it.
April 6th, 2009 at 10:07 am
What business is it of yours what “the Ballmers” of the world do with their money and how they transfer their wealth? What business is it of ANY of us to determine these issues?
April 6th, 2009 at 10:14 am
Samuel, if you want to sit at the grownups table and discuss these things, you must first put down your copy of Atlas Shrugged and read up on the origins of the common law, property rights and the feudal system.
April 6th, 2009 at 10:34 am
Samuel at 27 – because ever since the days of the American Revolution, there has been the republican idea that entrenched, concentrated wealth is dangerous for the health of the Republic, especially if it’s inherited. Why? 1. Equality – small-r republicans believe that you need a “rough equality” of wealth in a republic, to ensure that citizens think of each other as equals and don’t defer to higher socio-economic status. 2. Sovereignty – small-r republicans believe that no force or institution should have as much power as the sovereign people, and thus private collections of ultra-wealth can become dangerous private collections of power. 3. Economic power is political power – following from point 2, small-r republicans also believe that power in one realm will bleed into the other; hence, even if collections of great wealth don’ directly challenge the supremacy of the state, they will use their money to corrupt and control the Republic.
April 6th, 2009 at 11:01 am
27: Obviously there are a lot of issues going on here that deserve a lot of background work. Not to mention that fact that raising this kind of objection in this context is ignoring a lot of groundwork that is pretty much assumed in the context of liberal policymaking. But here’s the most direct answer I can give you: that wealth only exists in a society that enforces property rights. If most of us don’t agree to the rules of that society and declare them null and void, that inherited wealth doesn’t exist. To regard taxation on any form of wealth as a form of theft requires an assumption of something like a Nozickian state as a just arrangement. But defending the Nozickian state as avoiding said theft is just circular reasoning… (and the fact that Nozick couldn’t come up with a better argument is pretty much why his theory is crap)
April 6th, 2009 at 11:25 am
It’s funny how almost every discussion of wealth and inheritance either begins or ends with a reference to Paris Hilton.
April 6th, 2009 at 11:28 am
Part of this variation is probably due to how much massively wealthy CEOs value marginal increases in their pay, and how much they’re willing to fight for it. The utility of dollars has a diminishing return and the overall wealth of CEOs is a lot more diverse than that of probably any other job. You’ve got a range all the way from Really Loaded to Multi-Billionaire. So it’s not surprising to see that Steve Ballmer has not played hardball with Microsoft in order to get above average CEO compensation. Aside from the super-rich, there are CEOs who seem to view themselves as social entrepreneurs rather than wealth-maximizers. The CEO of JetBlue makes a few hundred thousand dollars, much of which he apparently donates to employee charities.
Of course the fact remains that many CEOs are paid absurd sums. But we shouldn’t assume that every CEO, no matter how rich, is trying to squeeze every last dime of compensation out of the company, and then marvel at how incoherent the pay structure is.
April 6th, 2009 at 11:50 am
When Matt stated that the Silicon valley model does
not do the “heads I win, Tails I win” CEO compensation,
he forgets about backdating of stock options at Apple
and others, which turned into just that approach.
He even mentions “rigged stock option plays”.
How cute.
April 6th, 2009 at 12:56 pm
RE: The German
That translation is obviously from Babelfish or something, the text is kind of cleverly written and does make sense–basically, Germans should be angrier about the financial crisis and more radically anti-capitalism–, but it sounds pre-packaged, or like an extract from a longer rant. I really have no idea why these keep showing up.
April 6th, 2009 at 1:42 pm
13, I like that idea. But I also like the idea of taxing corporations differently according to the ratio between the CEO’s pay and the pay of the lowest salaried employee. After some threshold has been reached – say, CEO pay = 19 times the lowest paid employee – serious tax penalties should ensue. Cause really, if Boeing can afford to pay the CEO that much, they can afford to pay all their employees much, much more – maybe a 100 percent raise.
This would be excellent for everyone. We need a spiral of wage inflation in this country. Obviously, we are suffering this slump because, finally, the vast majority of Americans make way too little, and the small minority make way too much. We don’t need an absolute equality, but we should be heading for a lot more equality. Expropriating wealth from the wealthiest via the tax system is one way of going about this, but putting incentives into the tax code to make sure that upper management is not paid too much – and thus can’t entrench its socio-economic position, engage in lunatic and greedy business plans for short term gain, and capture the political class in D.C. – would solve the problem of the overpaid old farts. Of course, all that best and brightness might then Galt off to Singapore or Dubai – double points! Since upper management is generally a debile and stupid class that latched onto the headhunters milktrain and has made it in a ludicrously closed labor market.
April 6th, 2009 at 1:59 pm
Apparently Jeffrey Rein is 4.7 times the CEO that Steve Ballmer is. And Boeing has a CEO who’s a staggering 10.7 times more effective than the top executive at Microsoft.
Wages are supposed to equal marginal product of labor, not average product of labor. If supply and demand are both extremely inelastic, you could get this kind of an effect.
April 6th, 2009 at 2:25 pm
For the record, while Paris Hilton certainly grew up as a rich kid, her grandfather is giving 97% of his wealth to a charitable foundation, and she actually earns millions of dollars through her own efforts (well, I don’t know how much effort goes into it).
The point being is that while she’s certainly inherited a lot more wealth than most of us have (I can’t speak for Yglesias), there are other young layabouts who’ve inherited much more money and have never worked a day in their lives. She’s the poster girl for inheritance more due to her fame and lack of discernible talent rather than being at the top of the inheritance heap.
April 6th, 2009 at 3:47 pm
A decent society, Yglesias, understand the importance of inter-generational continuity and stability, would value the benefits of smooth family transitions, and would desist from imposing confiscatory tax on deaths.
April 6th, 2009 at 3:47 pm
In short, those people who seek to confiscate wealth through death are indecent.
Just because you don’t like Paris Hilton, or that she does not exemplify good taste, manifestly does not, and I repeat, does not have any bearing, philosophically speaking, on whether she has legitimate title to large amounts of wealth. To think so is to adopt the communistic mindset.
April 6th, 2009 at 3:49 pm
…and also to extinguish the individual within the faceless masses.
April 6th, 2009 at 4:31 pm
A sad Tale of Tails:
“But not through “heads I win, tales you lose” bets were bonuses are handed out regardless of performance or through rigged stock option plays.”
April 6th, 2009 at 5:18 pm
A decent society tries to do the least harm possible when raising the necessary tax revenues. And the estate tax is just about the least harmful form of tax.
That’s bullshit logic. First off, shrink government and decrease government involvement, so overall tax burden remains small. This is like saying, the post-war UK Labour Gov’ts needed to take 60% of the national income, and let’s figure out a good way to do this manifestly insidious deed.
Let’s not do the deed in the first place.
April 6th, 2009 at 5:23 pm
It seems fairly clear that European and Silicon Valley norms are healthier than those prevailing elsewhere in the United States. There’s no sign that major European multinationals are crippled by an inability to attract competent executives—the norms are just different and the European CEOs are happy to work for “mere” millions rather than tens of millions. The Silicon Valley model, meanwhile, does let people become incredibly wealthy. But not through “heads I win, tales you lose” bets were bonuses are handed out regardless of performance or through rigged stock option plays. It seems to me that we could have a much healthier corporate America with more Steve Ballmers and more Louis Galloises and fewer Jeffrey Rein’s.
============================================================
Hard to believe that a guys who LOVES the NBA, would write this simple-minded crap. Should Matt start writing on the correlation of NBA salaries and statistical productivity? Or how the norms of basketball leagues in Europe are healthier than those of the NBA because they don’t pay as much?
The NBA is full of guys who have good years, parlay that into a great contract, and then fall on their faces. Or overachievers who don’t make as much money as big names, but out produce them. Or guys that you might think are overpaid, but the coach and owner wants them around because they contribute to team chemistry.
US corporations are the same way. There is a wild and wide variety of ways CEOs get to where they are salary-wise. Some make sense and some are stupid – a combination of luck, competence, incompetence, the market, and happenstance.
All this really comes down to is Yglesias thinks CEOs here are overpaid. Hell, I think everybody in the NBA is overpaid.
April 6th, 2009 at 6:35 pm
Campesino, you make an excellent point. There are no NBA teams – none! – where one of the players makes 300 times the least salary of the other player. They are all within the range of, say, CEO salaries in America in the seventies. And look what results – the world’s best basketball teams.
I suppose the real question is: if one brings the CEO salary down to the NBA level, so that the CEO makes about nine times the least salary, the question next is: what to do with all the money that is freed up. One thing you don’t want is for that money to go to shareholders. Shareholders are basically parasites, who make money from having money. To really kettle the situation, one needs a limit on speculation in equities too. Theodore Roosevelt thought the limit on the appraised worth of a company to its stock evaluation should be one to one. That sounds right to me. This will prevent companies from playing bad basketball, driving up stock prices with unsustainable earnings, and cut out the madness of the speculative sector. It would also make the private allocation of capital a lot more efficient. And it would drive up the salaries and wages of the rest of the team.
An NBA populism, that’s what we need.
April 6th, 2009 at 6:53 pm
It would also make the private allocation of capital a lot more efficient. And it would drive up the salaries and wages of the rest of the team.
An NBA populism, that’s what we need.
============================================================
We really ought to take these points up to Matt’s post later today on the two Turkish NBA players, both of whom make more money than the Walgreens and MicroSofts CEOs.
If the government continues to meddle in CEO salaries, I predict the CEOs will form a union. How would Yglesias handle that one? Everyone knows unions make life better for Americans
i
April 6th, 2009 at 7:09 pm
Dan Ariely of Duke University performed an experiment that paid people varying sums of money and noticed those paid incredible sums for their tasks (Indians were used so they could be paid ~1 year of income in the study for the ‘ceo’ case) performed worse than less compensated participants. Tim Harford’s The Logic of Life suggets that CEO pay is exorbinant simply to motivate the rest of the employees. Arbitrary? You betcha. Maybe ceos should do nothing…
April 6th, 2009 at 7:22 pm
A decent society, Yglesias, understand the importance of inter-generational continuity and stability, would value the benefits of smooth family transitions, and would desist from imposing confiscatory tax on deaths.
Uh huh….good luck with the pro-aristocracy argument there, Fauntleroy. Alas, this society doesn’t seem to put a premium on caring whether little Thurston Howell IV can afford the same number of yachts and summer homes as his dear old father. Heaven forfend – how indecent! Best you hie thee hither back to your time machine and return to late-1780s France forthwith!
April 6th, 2009 at 9:28 pm
The idea that a nation of 300 million people should have a small government seems pretty laughable to me. But it could have a more efficient government. Small government people should think about combining various states, many of which seems to have no rational at all. Nebraska and Kansas, for instance. Minnesota and the Dakotas. Talk about large government – it is simply onerous and antiquated to have two Carolinas, for instance. Get rid of all this extra government. Collapse Alaska and Washington together. Utah, Arizona and New Mexico. Pull all that stuff down, and look at the savings that would result. Besides which, there would be a much fairer sorting of power. We wouldn’t have this Midwest White Minority sitting on our necks. That North Dakota, South Dakota, Wyoming, Idaho each possess two senators is ludicrous. I think we can all agree that is way too much government.
April 7th, 2009 at 6:53 pm
I’m with neil here. Thain took the reins of a worthless company, sold a huge amount of their toxic assets, raised a ton of capital, and then got BoA to pay an incredible amount for a company that would have gone to 0 as soon as trading opened the following Monday. There are a ton of crappy bank CEOs, but Thain is definitely not one of them. Thain saved the government from having to choose between another bailout or letting them go down like Lehman (who would have been fine if they had raised capital and sold assets).
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