Are CEO's Overpaid?

[MtnBiker]

Mar 2, 2005
by Walter E. Williams

In the wake of the Enron and WorldCom corporate scandals, the purveyors of envy have found another opportunity to preach about what they consider the evils of high CEO salaries, retirements and bonuses. After all, according to them, evil must be afoot when a corporate executive earns more in a week that the average worker earns in an entire year. Let's look at it.

Dishonest Enron and WorldCom CEOs are rare among corporate executives. As such, all CEOs shouldn't be tarnished for the misdeeds of a few any more than we'd tarnish all newspaper reporters because a few among their ranks were liars like the Boston Globe's Patricia Smith and Mike Barnicle, Jayson Blair of The New York Times, and The Washington Post's Janet Cooke.

Is a CEO worth millions of dollars to a corporation? When Jack Welch became General Electric's CEO in 1981, the stock market judged the company to be worth about $14 billion. Through hiring and firing, buying and selling, Welch turned the company around before he retired in 2001. Today, GE is worth nearly $500 billion, making it one of the most valuable companies in the world. What's a CEO worth for providing the brains and leadership to turn a $14 billion corporation into one worth $500 billion? How about paying just a measly one-half of a percent of the increase in value? If that were the case, Welch's total compensation would have come to nearly $2.5 billion, instead of the few hundred million that he actually received.

The Gillette Co. was in the early stages of corporate death in 2001 when Jim Kilts took over as CEO. The company's stock had lost almost half of its value in two years, and sales volume and market shares of its major brands had plummeted. Between the time Kilts took over at Gillette and this year's Jan. 28 announcement of Procter & Gamble's purchase of Gillette, Gillette's market value increased by $11.3 billion, a 34 percent improvement, and since the announcement, Gillette's value has risen by another $5.7 billion.

Kilts' salary and bonuses over the past four years, totaling about $17.5 million, haven't been especially large by CEO standards. Predictably, however, Kilts' pay and particularly the size of his compensation package from the merger -- $153 million -- have been the subject of media carping, particularly in Boston, where Gillette is headquartered. This figure is indeed large, but it, added to what Gillette has paid him since 2001, makes Kilts' total compensation a mere 1.5 percent of his contribution to Gillette's value.

Here are a couple of questions to you: If you were the owner of GE, and a CEO could turn your $14 billion corporation into a $500 billion one, how much would you be willing to pay that man in salary and bonuses? Or, in the case of Jim Kilts, turning Gillette from a corporation in steep decline into one Procter & Gamble was willing to buy for $57 billion, how much would you be willing to pay?

Then, you might ask yourself: If a corporate board of directors could buy a $300 computer that could do what a CEO could do, would it pay CEOs millions of dollars? By the same token, if an NFL owner could hire a computer to make the decisions that star quarterbacks make, why would he pay some of these guys yearly compensation packages worth more than $10 million?

There's another important issue. If one company has an effective CEO, it is not the only company that would like to have him on the payroll. In order to keep him, the company must pay him enough so that he can't be lured elsewhere.

If you ask me, I know of only one class of workers who are overpaid and underworked -- college professors.

Link

Yet another fine analysis by Professor Williams

 

[G Edward Cook]

Yes! Yes! Yes they do and I see you know what I'm talking about.
Sincerely,
G Edward Cook

 

[Annie]

Yes! Yes! Yes they do and I see you know what I'm talking about.
Sincerely,
G Edward Cook

Wow, I thought for sure you would think the likes of Jack Welch and other CEO's were overpaid, at the expense of the 'workers.' Good for you!

We can all agree that tenured professors are overpaid!

 

[KarlMarx]

Wow, I thought for sure you would think the likes of Jack Welch and other CEO's were overpaid, at the expense of the 'workers.' Good for you!

We can all agree that tenured professors are overpaid!

One thing I learned recently when it comes to economics, there is a difference between the price of something and its value. People are paid what the market dictates.....

Adam Smith illustrated this with the "Diamond/Water paradox". Water is very valuable, because without it, we would die. Yet, it is very cheap. Diamonds, on the other hand, have little purpose except as jewelry and are very expensive. I'd like to substitute teachers and basketball players for this example. Teachers are valuable because they educate our children and yet, realatively cheap. Basketball players are good for almost nothing but dribbling a ball (and occassionally getting themselves put in jail or drug rehab) and get paid millions.

It is very easy to equate a person's worth with their paycheck, yet if economics is to be believed, then that is not the case.

 

[MtnBiker]

Yes! Yes! Yes they do and I see you know what I'm talking about.
Sincerely,
G Edward Cook

Did you even read the article? It made the case that in fact CEO are not overpaid.

 

[Annie]

Did you even read the article? It made the case that in fact CEO are not overpaid.

LOL! Thus my post!

 

[Hobbit]

Try being a CEO for a day and you'll understand exactly why they're paid so much.

 

[USViking]

The outright dishonesty of the Enron and WorldCom
CEOs is not the only problem.

There are vast numbers of cases where CEO preformance,
although perfectly honest, is ineffective, while CEO pay
remains at stratospheric levels.

As KarlMarx has pointed out, this disparity is not the
result of rational economics.

It is the result of CEO power, and the difficulty imposed
by the structure of our corporations in controlling this
power to the extent CEOs are actually paid for preformance.

 

[Mr.Conley]

One problem at my dad's company was that they had the Chairman/CEO deal going on. The board was the only one who could fire the CEO, but the CEO was in charge of the board. Then when the guy started doing really bad, there was nothing they could do until the annual shareholders meeting finally came and they bumped him out. Its a pretty good example of the importance of checks and balances.

Edit: Wow! 100 posts!! I can feel the power.

 

[Annie]

One problem at my dad's company was that they had the Chairman/CEO deal going on. The board was the only one who could fire the CEO, but the CEO was in charge of the board. Then when the guy started doing really bad, there was nothing they could do until the annual shareholders meeting finally came and they bumped him out. Its a pretty good example of the importance of checks and balances.

Edit: Wow! 100 posts!! I can feel the power.

You should be at 20k+ :coffee3:

 

[Mr. P]

I’m just curious if any of the folks that think CEOs are overpaid have ever been around any CEOs on a regular basis? Do you have a clue how many hours they work or what they are responsible for?

I have been around many of them, and I do know, so my answer is…NO they are not paid too much.

 

[Annie]

I’m just curious if any of the folks that think CEOs are overpaid have ever been around any CEOs on a regular basis? Do you have a clue how many hours they work or what they are responsible for?

I have been around many of them, and I do know, so my answer is…NO they are not paid too much.

Eli Lily and Heinz. Not overpaid.

 

[USViking]

I’m just curious if any of the folks that think CEOs are overpaid have ever been around any CEOs on a regular basis? Do you have a clue how many hours they work or what they are responsible for?

I have been around many of them, and I do know, so my answer is…NO they are not paid too much.

It does not matter how hard they work:
many are paid too much in view of small
profits, stagnant profits, and declining profits.

 

[Annie]

It does not matter how hard they work:
many are paid too much in view of small
profits, stagnant profits, and declining profits.

Based on what, in generalities?

 

[Mr. P]

It does not matter how hard they work:
many are paid too much in view of small
profits, stagnant profits, and declining profits.

And that falls on the BOD to take care of. If they keep the guy the must see value in what ever he's doing. It's not as cut n dry as you may think it is.

 

[USViking]

Based on what, in generalities?

Well for example, I would be real interested
in seeing a graph plotting GM CEO pay against
GM profits for the last 50 years.

 

[USViking]

And that falls on the BOD to take care of. If they keep the guy the must see value in what ever he's doing. It's not as cut n dry as you may think it is.

When have you ever heard of a BOD
cutting a CEO's salary?

They do not have to fire him to keep
his pay in line with what it should be
considering the company's performance.

 

[Annie]

Well for example, I would be real interested
in seeing a graph plotting GM CEO pay against
GM profits for the last 50 years.

I'm sure you would. Why should tha† be presented to you?

 

[USViking]

I'm sure you would. Why should tha† be presented to you?

I suspect It might show two lines going
in opposite directions:

Profits w-a-a-y down
CEO salaries w-a-a-y up.

This would provide corroboration for the
view I have staked out in this thread,
namely that CEO salaries do not reflect
performance.

As I indicated in my last post, I would not
necessarily insist on the CEO being fired.

But if umpteen thousand people lose their
jobs, I think there is a bit of a moral ground
for suggesting the CEOs ought to feel some
pain themselves, assuming a reduction in
salary from $10 million to $5 million, or some
such, can actually be considered "pain".

 

[Annie]

I suspect It might show two lines going
in opposite directions:

Profits w-a-a-y down
CEO salaries w-a-a-y up.

This would provide corroboration for the
view I have staked out in this thread,
namely that CEO salaries do not reflect
performance.

As I indicated in my last post, I would not
necessarily insist on the CEO being fired.

But if umpteen thousand people lose their

ok
for suggesting the CEOs ought to feel some
pain themselves, assuming a reduction in
salary from $10 million to $5 million, or some
such, can actually be considered "pain".

ok whatever