Bogus Bonuses and C.E.O. Salaries
One of the most common justifications for hefty C.E.O. compensation packages is that if the leaders of industry are not paid well, the so-called best and brightest will no longer flock to fill the corporate ranks, and will instead go elsewhere. High salaries (and bonuses, etc) are said to both motivate and retain these brilliant minds.
While this sounds somewhat plausible, as it turns out, a new study shows that it's just not true. One driver of executive pay, called the peer-group benchmark, compares the salaries of executives among ostensibly similar companies as a way of keeping salaries competitive and within reasonable market limits. The problem is, this measure assumes that a C.E.O. at one company could pick up and leave for greener pastures at another, which, as it turns out, is a false presumption.
The study, conducted by Charles M. Elson and Craig K. Ferrere, shows that many of the skills C.E.O.s possess are specific to the company in which they are acquired, and are not readily transferable to other companies. Their analysis shows that almost every attempted transplant at the top ranks has resulted in failure.
What this means is that all this benchmarking makes the market of C.E.O.s seem like a market with high mobility, allowing for C.E.O.s to move to other companies when in fact a C.E.O. who manages one company well is unlikely to be successful in another. Therefore, a company looking for a C.E.O. cannot actually consider all C.E.O.s as potential candidates. Benchmarking, then, is little more than a way to inflate executive salaries by comparing jobs in markets that are essentially incomparable.
Ultimately this study shows that determining executive salaries needs to be reevaluated and reconfigured with an eye to empirical data, even if that means reducing C.E.O. pay. After all, we are all shareholders in these companies and they are giving away our money for what turns out to be no good reason.
Comments (21)
Your acting like $15MM is a lot of money and will have an impact on shareholder equity.
It's almost as funny as taxing 1% of Americans more to reverse $15 trillion of debt.
So I guess competitively compensating a leader of a major corporation (e.g. James Gorman) is the same as giving every Morgan Stanley employee (roughly 62,000 people) a 1000% raise. Nice try bro, but you're an idiot.
If the study says CEO skills are specific to the company, then why would you let the CEO go if there is no one to replace him? This is as much against-salary&bonus argument as it is for-salary&bonus argument.
BTW, I don't have a side, I'm just trying to see this issue from all angles. When I'm CEO, I want $^MM, I'm just trying to understand the logic beyond "I'm in charge and I'm the chairman of the board that sets my pay, so fuck you."
If there are hyper-qualified people shooting for CEO and who are willing to accept lower salary, then the article should focus on corporate governance and how to make those changes, and not on CEO's prospects after departure.
The article operates on assumption the talents("talents" if you prefer) should be retained but increasing pay is not necessary because they have nowhere to go. If you think current management is expensive, yet there are people to replace it with, then why not make the replacement? An argument that you can replace people at a cheaper cost (what you said) makes an argument that decreasing salary will not lead to departures (what the article said) redundant.No where did anyone say companies cannot find people to replace them, who are better fit for CEO than their current CEO. Only that current CEOs are specific to their company. Reading comphresion bro.
that was a horrible post.
Great read. thank you.
Companies should stop paying CEO's in stock.
Executive pay has never really bothered me. Both because it doesn't really impact shareholder value, and its serves as a motivational tool. If you are a middle manager at XYZ corp, that 7 figure payday might get you to put forth a bit more effort than you would otherwise.
Also, I view it a bit like portfolio manager salaries. The difference between the best PM and a mediocre PM might be less than 1% at a large mutual fund. But over billions of dollars of assets...a 7 figure compensation package is not unreasonable.
I think CEOs are partially compensated for the risk that accompanies their position. The average CEO at a F500 has a fairly short tenure (I think I saw 5 years somewhere?). They are the public face of their company, and may be the scapegoat even if they did nothing wrong; e.g. a CEO of a steel company is blamed when steel prices collapse. Of course, a fired CEO can usually transition to a C-Suite elsewhere...
Another obvious argument against high non-founder CEO pay is that US CEOs are paid much more than Asian/European CEOs with no obvious advantage in shareholder growth.
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