From a system perspective, not a human perspective, compensation for work in capitalism is the system’s way of communicating to people that the system needs more or fewer people in a job. Not enough bricklayers means rising salaries and too many means lower salaries. The trend continues until the number of people doing the work roughly matches what is needed at the market clearing price and the people are generally satisfied with the compensation.
So what does that tell us about the US distribution of population in the labor market? The distribution of compensation is highly skewed and madly demanding more people get into the job of running companies. It’s highly lucrative work that on balance tends to create labor demand. Our lack of labor demand and the resulting salary stagnation are not a harmless consequence.
But people aren’t rushing into the CEO business anywhere near the numbers necessary to drive compensation down. It’s not like the current crop of CEOs is uniformly magnificent and we simply cannot do better. The wrecked companies littering the corporate landscape around the country are a testament to that. And failure at being a CEO would seem not to carry the same penalties as a spectacularly public malpractice for a doctor or lawyer.
So why has CEO production not drawn attention of the same people addressing the “IT shortage”? Why doesn’t the CEO grooming process create more candidates that drive costs down? Why is shareholder value being squandered in so many cases in highly compensating a stream of short lived, not very good chief executives, who drive the company into disaster time and again?
There’s something wrong with our CEO system.
Cross posted Flit-TM
Teachers, or policemen, or firemen get overpaid and underscrutinised when the politicians who are meant to represent the interests of the electorate are actually mainly representatives of public sector unions.
Aren’t CEOs overpaid and underscrutinised for similar reasons?
CEO jobs are difficult and the compensation often, not always, represents the difficulty of finding the right person. Where it beaks down is in the severance packages for failing CEOs. Much of this may represent a collegial relationship with corporate boards. “There but for…”
Ricks’ book on generals makes a similar point.
I have been a surgeon for over 45 years although retired from practice for nearly 20. The pace is OK for the young men, and women I guess. As you get older, there is less ability to do without sleep and rest. I have not had experience with really good women surgeons but I am sure there must be some.
Doctors are trending to reduced work hours and shorter careers. A lot of this is the role of female medical students who, just as admissions committees suspected in the 50s, do not work the hours that we did. There is also a trend to resisting long hours for residents and even students. One source of this is the Libby Zion Law .
The lawsuits and regulatory investigations following her death, and their implications for working conditions and supervision of interns and residents were highly publicized in both lay media and medical journals.
I think this set back medical education by years but then I am a dinosaur.
The CEOs depend on colleagues to divert the consequences of malpractice, just as army officers do.
A lot of people are drawn to careers in law or finance because they think (probably accurately, at least until recently) that these represent more-assured career paths, in terms of lucrativeness and status, than the running-companies path. I think the conveyor-belt nature of the education system plays into this.
It has long been my belief based on my years in business that compensation is directly related to the amount of damage that can be inflicted on the company by a given employee. Since the amount of damage a CEO can do is only limited by the value of the company, their compensation tends to be high.
There are other factors than supply and demand in determining CEO pay.
First, the demand is static as you can’t create new CEO positions without creating new companies that require a CEO level position.
Second, another factor of CEO pay is that when a private company goes public, to get the old owner to stay on as a CEO, he needs to be paid near what he was making when the profits of the company was going only to the owner
Next, related to the second, a CEO should be paid similar to what he’d be able to make at another company. Usually you move jobs to get better pay, CEOs are no different. This can create a spiral of CEO pay that keeps going up as CEOs go from job to job
Can one produce CEOs, or is getting to CEO level luck? Sure there are training prerequisites, like an MBA, but how many MBA aren’t CEOs?
Overload…”another factor of CEO pay is that when a private company goes public, to get the old owner to stay on as a CEO, he needs to be paid near what he was making when the profits of the company was going only to the owner”
There are relatively few companies that are in a position to go public where the ownership is vested in a single individual who is also CEO. Usually there are multiple owners, often but not always venture capital funds and individual venture investors. The CEO’s expected compensation will largely be in the form of stock or stock options whose value will be unlocked only by either going public, or selling the company to a larger enterprise.
Total compensation of many CEOs leading large, complex, and important companies such as GE, Boeing, Danaher, and IBM tends to fall in the $20-$30MM range. While it’s not exactly chump change, compare it with the incomes and the amounts of wealth accumulated by people like Al Gore and Bill Clinton, or any of a number of entertainers and athletes.
This might be a good place to start.
There is some luck. Rumsfeld was a friend of the Searle family but did a very good job.
MK…the Drucker book was written a long time ago, but I think it is still of great value for the practicing manager/executive.
This is a no skin off my nose situation. I can have no rational or reasonable opinion on how much somebody should be paid. If my intuition is that the deal sucks, I should short the stock.
In the long run private persons are pipsqueaks. The government that now engrossing half of the economy is much more to be concerned with.
I don’t care what somebody else does with his money, I care about what government is doing with my money.
I adjure everyone to remember the words of our master:
An Inquiry Into The Nature And Causes Of The Wealth Of Nations;
By Adam Smith, LL.D. and F.R.S. of London And Edinburgh:
Formerly Professor of Moral Philosophy in the University Of Glasgow
Edinburgh: 1776
BOOK II. Of the Nature, Accumulation, and Employment Of Stock.
CHAPTER III. Of the Accumulation of Capital, Or Of Productive and
Unproductive Labour.
After reading Adam Smith above one is forced to observe; It’s not a radical position to say that, simply, currently in the U.S., “any development that inhibits federal government is a good thing.”
The problem is not that there are too few good CEOs being paid improperly, but that there are too few CEO jobs due to over concentration of industry. Make stock swaps illegal and there would be a lot more CEO jobs and CEOs who were properly trained and motivated. The same thing is going on in the Navy where there are too few floating commands and too many flag officers getting fired. Ditto the USAF. There are too few early leadership opportunities for the young where they can make mistakes, learn from them and survive.
The nature of business competition and creative destruction implies that there will *always* be a substantial number of CEO failures, just as the nature of warfare implies that there will be a substantial number of defeated generals and the nature of football implies that there will be a substantial number of losing coaches.
Ideally, of course, the competition, the warfare, and the football will all take place on a higher rather than lower level of skill, but this will not change the inherent requirement that somebody loses.
If CEOs get gargantuan pay-offs partly to keep their lips sealed, it would surely be cheaper just to bump them off. The fact that this isn’t done just shows that the Boards don’t act in the interests of shareholders.
Dearieme – On the nose, I think. The public union/CEO similarity in how incentives diverge from what they are supposed to be is a neat parallel to draw.
Michael Kennedy – Would you agree that the collegial atmosphere you point to betrays the shareholder interests that the board is supposed to have a fiduciary duty to represent?
Phwest – Would it be fair that this is a danegeld model of employee compensation?
Overload in the CO – I don’t understand why the requirement that you make new companies to create new CEO positions means that demand is static. Compensation does not always go up on a move in any field that I can think of. Why would this be uniquely true of CEOs? Finally, not only are CEOs not required to have MBAs, some of them don’t have college degrees. Most famous in this group is Bill Gates.
Robert Schwartz – It’s difficult to know where to start. Perhaps the best would be to demur from the idea that Adam Smith is my master. He is a very educated man whom I admire greatly but master? I don’t think so. I am a free man.
I think you might not understand what I am about. It is certainly not to pass sumptuary laws or any like nonsense. Your Smith quote is simply not on point. It rather is to examine a curiosity, that we talk about how the supply and demand of just about every job description except for CEOs. Why aren’t people creating CEO startups to lower the cost of competent leadership sufficient that the supply goes up and the compensation goes down?
David Foster – There is no inherent reason why a substantial number of CEOs must lose. Ryder sold the yellow trucks. Berkshire Hathaway used to be a textile manufacturing firm. Competent leadership would mean realistically examining your prospects and moving the company to a new set of business if the current landscape is not a favorable one. There are economic niches that are currently entirely uninhabited. A well executed move into one or more of them would be a winning move and reduce the number of losing companies.
“Michael Kennedy – Would you agree that the collegial atmosphere you point to betrays the shareholder interests that the board is supposed to have a fiduciary duty to represent?”
That was my point. The Army has been going through something like this since the Korean War with generals. that’s what Tom Ricks’ book is about.
“Chainsaw Al” Dunlap is a case in point. It is delicious that: “Dunlap graduated from West Point before being employed by Lily Tulip Cup and Scott Paper.”
At least for a while, he did what he was hired to do.
“Perhaps the best would be to demur from the idea that Adam Smith is my master.”
As Lord Keynes wrote: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
http://en.wikiquote.org/wiki/John_Maynard_Keynes
I would assert that none of us can claim an original set of ideas, particularly when it comes to our social and political environment. It is too big and too complicated for any of us to grasp by our own efforts. We all accept discipleship to some set of thinkers. And, because human history is sufficiently long, most of them are dead now.
The question then is whose ideas will we use to understand our world. I prefer the ideas of Adam Smith, David Hume, John Locke, and the other thinkers of the British enlightenment to the ideas of say, Kant, Rousseau, and Marx because I understand them to be more consonant with the ideas that animate the American Experiment and the progress of liberty everywhere, which are the things that I hold in the highest regard.
When I say that Adam Smith is our master I refer not to his physical or legal power over us, which is zero (0) since he has been sleeping in the dust for more than 2 centuries. I mean that the power of his ideas should command our respect and study. They should empower us to understand our world. They are a source of illumination to the friends of liberty everywhere.
I am particularly fond of the quote from Smith that I set out above, because it illuminates so much modern political cant about income and consumption which cuts across so many issues such as corporate governance and the “environment”.
My take, from limited information, is that the CEO fraternity is in full effect, and if you are not a member of this club currently, you will likely not be a member in the future.
CEO’s are significantly overpaid, in my opinion. That is a result of Boards of Directors trying to lure individuals they think are able to do ‘magic’ to their fold. The compensation committees seem to look to each other for information on the ‘value’ of CEOs, and pay and perks reflect that.
I have observed very few CEOs that deserve the compensation they are paid. Many are just lucky to be in their post, running companies whose capital they had nothing to do with creating or accumulating. They happen to be in the right place at the right time, and are able to ‘sell them self’ as boy or girl ‘wonders’ who will take the stock value to higher and higher limits.
Most do not, and walk away with golden parachutes in very few years.
I observed the parade at AT&T that was unable to turn the Leviathan from its course over a 20+ year period. They ‘looked over the fence’ at the competition, and their reported costs & expenses, and said “we are too expensive. Cut costs to compete.” They followed that edict, disregarding their knowledge of costs gained from years of experience, and tried to meet the figures reported by their competitor. The competitor was lying, they went bankrupt. AT&T ignored the internal knowledge their people had, and cut itself to the bone. The CEO was in large part responsible for that. Just like Jack Welch thought “there is always someone at the bottom who is the worst performer, and they must be trimmed and let go annually”, and for a while that works. Once you start to discard effective and productive workers based on someone’s theory, you are on the road to failure. The theory, in my opinion, requires that the people you hired a while ago are incompetent, and must be fired. Always. Bad theory, bad CEO with limited vision imposing their will upon stockholders assets. In most cases, to line their own pockets at the expense of the shareholders.
It was often said that the company lived or died on its current stock market evaluation. That gave power to analysts who may not have had the stockholders best interests at heart. It sure gave the CEO’s incentive for short term gains, at the expense of long term viability. Witness that AT&T is no longer. The name lives on, but the company is gone.