CEO Pay Often Not Linked to Performance

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There is virtually no relationship between relative CEO pay and relative corporate performance. One reason is because CEO's aren't paid based on performance. They are paid relative to how other CEOs are paid.

THOUSAND OAKS, Calif. — As the board of Amgen convened at the company’s headquarters in March, chief executive Kevin W. Sharer seemed an unlikely candidate for a raise.

Shareholders at the company, one of the nation’s largest biotech firms, had lost 3 percent on their investment in 2010 and 7 percent over the past five years. The company had been forced to close or shrink plants, trimming the workforce from 20,100 to 17,400. And Sharer, a 63-year-old former Navy engineer, was already earning lots of money — about $15 million in the previous year, plus such perks as two corporate jets.

The board decided to give Sharer more. It boosted his compensation to $21 million annually, a 37 percent increase, according to the company reports.

Why?

The company board agreed to pay Sharer more than most chief executives in the industry — with a compensation “value closer to the 75th percentile of the peer group,” according to a 2011 regulatory filing.

This is how it’s done in corporate America. At Amgen and at the vast majority of large U.S. companies, boards aim to pay their executives at levels equal to or above the median for executives at similar companies.

The idea behind setting executive pay this way, known as “peer benchmarking,” is to keep talented bosses from leaving.

But the practice has long been controversial because, as critics have pointed out, if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance. Few if any corporate boards consider their executive teams to be below average, so the result has become known as the “Lake Wobegon” effect.

It wasn’t until recently, however, that its pervasiveness and impact on executive pay became clear. Companies have long hid the way they set executive pay, but in late 2006, the Securities and Exchange Commission began compelling companies to disclose the specifics of how they use peer groups to determine executive pay.

Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group. This creates just the kinds of circumstances that drive pay upward.

Moreover, the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her “peers” earn than by the company’s recent performance for shareholders, according to two independent research efforts based on the new disclosures. One was by Michael Faulkender at the University of Maryland and Jun Yang of Indiana University, and another was led by John Bizjak at Texas Christian University.

“Peer benchmarking has a significant influence on CEO pay,” Bizjak said. “Basically, you can’t have every CEO paid above average without pay ratcheting upward over time.”
Cozy relationships and ‘peer benchmarking’ send CEOs’ pay soaring - The Washington Post

There has been a fundamental breakdown in corporate governance in America.

The practice has persisted because corporate board members, many of whom have personal or business relationships with the chief executive, have been unwilling to abandon the practice.

At Amgen, for example, four of the six members of the board compensation committee had personal or business connections to Sharer before joining the board. In fact, he nominated at least two of the six to the board, according to a company source and reports.

These kinds of ties — between chief executives and the boards that oversee them — permeate corporate America. On a typical board, the chief executive considers about about 33 percent of the board of directors as “friends” rather than as mere “acquaintances,”according to a survey of chief executives at about 350 S&P 1500 corporations conducted over 15 years by University of Michigan business professor James Westphal.

More tellingly, the chief executive is likely to find even more friends on the compensation committees of corporate boards — almost 50 percent.

In an advisory vote by Amgen shareholders in May, about 56 percent of votes cast approved the company’s executive compensation. Many shareholders, however, are frustrated.

“The members of the Amgen board are basically just rubber-stampers,” said Steve Silverman, who owns one of the largest chunks of Amgen stock held by an individual investor. “Kevin put most of them on the board himself. If he’s getting paid too much — and he certainly is — they’re not going to say so.”
 
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expat_panama

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as a stock holder, I feel this practice hurts me and I believe it should stop!
You bought stock that hurts. You say you 'believe' it should stop but you're not even thinking of, oh I don't know --maybe SELLING your stock? Sounds like one of those kinky setups where 'stop' means 'don't stop'.

You know you don't have to pay for it, lots of places you can get it free...
 

Sallow

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Well duh.

Dick Fuld left Lehman after killing it with 20 million. Same with Jeff Wagoneer and GM.

The last 2 CEOs of the company I worked for kept losing market share and fired a crap load of people. They still got over 10 million a piece every year.

CEOs add very little value to their respective companies. It's a boy's club for the wealthy.
 
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as a stock holder, I feel this practice hurts me and I believe it should stop!
You bought stock that hurts. You say you 'believe' it should stop but you're not even thinking of, oh I don't know --maybe SELLING your stock? Sounds like one of those kinky setups where 'stop' means 'don't stop'.

You know you don't have to pay for it, lots of places you can get it free...
Actually, it sounds more like yourself. It doesn't matter how badly management is raping shareholders, shareholders should just STFU bitch and take it!

Corporate governance in America sucks. It's rife with cronyism and often devoid of personal responsibility. I thought conservatives and libertarians were all for personal responsibility? Apparently, for thee but not for me!

It's more than a little ironic that the best corporate governance in the world, where shareholders have the best rights and most control, is a place often derided by the American Right - Scandinavia. There, shareholders control the board, the nomination and compensation committees are appointed by shareholders, and there is only one insider on the board. If you do fine, great, you keep your job. If you suck, you're out. But in corporate America, shareholders have little voice. If you've stacked the board with friends and cronies, you can have such lousy performance, it would make a union highway worker blush, but at 400x the pay.
 

Sallow

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as a stock holder, I feel this practice hurts me and I believe it should stop!
You bought stock that hurts. You say you 'believe' it should stop but you're not even thinking of, oh I don't know --maybe SELLING your stock? Sounds like one of those kinky setups where 'stop' means 'don't stop'.

You know you don't have to pay for it, lots of places you can get it free...
Actually, it sounds more like yourself. It doesn't matter how badly management is raping shareholders, shareholders should just STFU bitch and take it!

Corporate governance in America sucks. It's rife with cronyism and often devoid of personal responsibility. I thought conservatives and libertarians were all for personal responsibility? Apparently, for thee but not for me!

It's more than a little ironic that the best corporate governance in the world, where shareholders have the best rights and most control, is a place often derided by the American Right - Scandinavia. There, shareholders control the board, the nomination and compensation committees are appointed by shareholders, and there is only one insider on the board. If you do fine, great, you keep your job. If you suck, you're out. But in corporate America, shareholders have little voice. If you've stacked the board with friends and cronies, you can have such lousy performance, it would make a union highway worker blush, but at 400x the pay.
Damn..can't rep ya.. :lol:
 

Againsheila

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as a stock holder, I feel this practice hurts me and I believe it should stop!
You bought stock that hurts. You say you 'believe' it should stop but you're not even thinking of, oh I don't know --maybe SELLING your stock? Sounds like one of those kinky setups where 'stop' means 'don't stop'.

You know you don't have to pay for it, lots of places you can get it free...
Our retirement fund isn't run by us, it's run by my husbands employers. We don't get a say in which stock to invest in, we can't even sell when it's low and buy when it's high as there is a 48 hour turn over. I can hardly wait until he retires and we can take control of our own money.
 

Mr Clean

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as a stock holder, I feel this practice hurts me and I believe it should stop!
You bought stock that hurts. You say you 'believe' it should stop but you're not even thinking of, oh I don't know --maybe SELLING your stock? Sounds like one of those kinky setups where 'stop' means 'don't stop'.

You know you don't have to pay for it, lots of places you can get it free...
Our retirement fund isn't run by us, it's run by my husbands employers. We don't get a say in which stock to invest in, we can't even sell when it's low and buy when it's high as there is a 48 hour turn over. I can hardly wait until he retires and we can take control of our own money.
That sounds like the kind of thing Enron was pulling.
 

Oddball

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Reload this Page CEO Pay Often Not Linked to Performance
Yeah....And?

During my brief foray into working in the corporate world, almost nobody's pay was based upon performance...In fact, if you performed too well and acted like you gave a shit, you'd usually run afoul of middle management types who had become fat, lazy and complacent in the corporate bureaucracy.

So what else is new?
 

Againsheila

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You bought stock that hurts. You say you 'believe' it should stop but you're not even thinking of, oh I don't know --maybe SELLING your stock? Sounds like one of those kinky setups where 'stop' means 'don't stop'.

You know you don't have to pay for it, lots of places you can get it free...
Our retirement fund isn't run by us, it's run by my husbands employers. We don't get a say in which stock to invest in, we can't even sell when it's low and buy when it's high as there is a 48 hour turn over. I can hardly wait until he retires and we can take control of our own money.
That sounds like the kind of thing Enron was pulling.
And this is Boeing. Oh, you can invest in Boeing stock if you want, that is the only concession.
 

Wiseacre

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How does one legally limit the CEO pay if the stockholders do not object? You could require companies above a certain profit threshold to distribute information concerning the salaries the top management execs relative to their industry and require a majority approval of compensation packages. But if they approve it, so be it.

For private companies, it should be whatever they can earn subject to the law of course. I haven't seen dara for private vs public CEOs, but I'm guessing the private ones are far less profitable and top management is not as highly compensated. But whatever they can pay themselves and still stay in business is on them.

In either case, the gov't has no business intervening, outside of ensuring no illegalities or unfair business practices are in play. If the information is diseminated and is accurate, thent he gov't has no further right to interfere.
 

Wiseacre

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Our retirement fund isn't run by us, it's run by my husbands employers. We don't get a say in which stock to invest in, we can't even sell when it's low and buy when it's high as there is a 48 hour turn over. I can hardly wait until he retires and we can take control of our own money.
That sounds like the kind of thing Enron was pulling.
And this is Boeing. Oh, you can invest in Boeing stock if you want, that is the only concession.

Off topic, sorry, but how do you and your husband feel about the plant opening in South Carolina? Do you feel the move should not be allowed because some idiot exec shot his mouth off? Most people realize that they would've moved to SC anyway to avoid union issues whether they say so or not.
 

Againsheila

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That sounds like the kind of thing Enron was pulling.
And this is Boeing. Oh, you can invest in Boeing stock if you want, that is the only concession.

Off topic, sorry, but how do you and your husband feel about the plant opening in South Carolina? Do you feel the move should not be allowed because some idiot exec shot his mouth off? Most people realize that they would've moved to SC anyway to avoid union issues whether they say so or not.
I'm more worried about the plants in Korea, China, etc, than in SC. Korea is actually making parts for our fighter planes...how stupid is that?

I just hope my husband retires before the whole thing comes crashing down.......

you can't continue to outsource jobs and expect the company to continue to do better. Henry Ford learned that almost a century ago.
 

Care4all

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as a stock holder, I feel this practice hurts me and I believe it should stop!
You bought stock that hurts. You say you 'believe' it should stop but you're not even thinking of, oh I don't know --maybe SELLING your stock? Sounds like one of those kinky setups where 'stop' means 'don't stop'.

You know you don't have to pay for it, lots of places you can get it free...
my my...quick to snap, eh?

all shareholders are being hurt dear, not just me and my stocks....the set up is unjust, and needs to change....

*we all would be better off if this cronyism was not inplace....to me, it would lead to a more sound market....
 
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Mr Clean

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And this is Boeing. Oh, you can invest in Boeing stock if you want, that is the only concession.

Off topic, sorry, but how do you and your husband feel about the plant opening in South Carolina? Do you feel the move should not be allowed because some idiot exec shot his mouth off? Most people realize that they would've moved to SC anyway to avoid union issues whether they say so or not.
I'm more worried about the plants in Korea, China, etc, than in SC. Korea is actually making parts for our fighter planes...how stupid is that?
I just hope my husband retires before the whole thing comes crashing down.......

you can't continue to outsource jobs and expect the company to continue to do better. Henry Ford learned that almost a century ago.

It just goes to show how seriously the powers that be take our national security.
 

Big Fitz

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There is virtually no relationship between relative CEO pay and relative corporate performance. One reason is because CEO's aren't paid based on performance. They are paid relative to how other CEOs are paid.

THOUSAND OAKS, Calif. — As the board of Amgen convened at the company’s headquarters in March, chief executive Kevin W. Sharer seemed an unlikely candidate for a raise.

Shareholders at the company, one of the nation’s largest biotech firms, had lost 3 percent on their investment in 2010 and 7 percent over the past five years. The company had been forced to close or shrink plants, trimming the workforce from 20,100 to 17,400. And Sharer, a 63-year-old former Navy engineer, was already earning lots of money — about $15 million in the previous year, plus such perks as two corporate jets.

The board decided to give Sharer more. It boosted his compensation to $21 million annually, a 37 percent increase, according to the company reports.

Why?

The company board agreed to pay Sharer more than most chief executives in the industry — with a compensation “value closer to the 75th percentile of the peer group,” according to a 2011 regulatory filing.

This is how it’s done in corporate America. At Amgen and at the vast majority of large U.S. companies, boards aim to pay their executives at levels equal to or above the median for executives at similar companies.

The idea behind setting executive pay this way, known as “peer benchmarking,” is to keep talented bosses from leaving.

But the practice has long been controversial because, as critics have pointed out, if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance. Few if any corporate boards consider their executive teams to be below average, so the result has become known as the “Lake Wobegon” effect.

It wasn’t until recently, however, that its pervasiveness and impact on executive pay became clear. Companies have long hid the way they set executive pay, but in late 2006, the Securities and Exchange Commission began compelling companies to disclose the specifics of how they use peer groups to determine executive pay.

Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group. This creates just the kinds of circumstances that drive pay upward.

Moreover, the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her “peers” earn than by the company’s recent performance for shareholders, according to two independent research efforts based on the new disclosures. One was by Michael Faulkender at the University of Maryland and Jun Yang of Indiana University, and another was led by John Bizjak at Texas Christian University.

“Peer benchmarking has a significant influence on CEO pay,” Bizjak said. “Basically, you can’t have every CEO paid above average without pay ratcheting upward over time.”
Cozy relationships and ‘peer benchmarking’ send CEOs’ pay soaring - The Washington Post

There has been a fundamental breakdown in corporate governance in America.

The practice has persisted because corporate board members, many of whom have personal or business relationships with the chief executive, have been unwilling to abandon the practice.

At Amgen, for example, four of the six members of the board compensation committee had personal or business connections to Sharer before joining the board. In fact, he nominated at least two of the six to the board, according to a company source and reports.

These kinds of ties — between chief executives and the boards that oversee them — permeate corporate America. On a typical board, the chief executive considers about about 33 percent of the board of directors as “friends” rather than as mere “acquaintances,”according to a survey of chief executives at about 350 S&P 1500 corporations conducted over 15 years by University of Michigan business professor James Westphal.

More tellingly, the chief executive is likely to find even more friends on the compensation committees of corporate boards — almost 50 percent.

In an advisory vote by Amgen shareholders in May, about 56 percent of votes cast approved the company’s executive compensation. Many shareholders, however, are frustrated.

“The members of the Amgen board are basically just rubber-stampers,” said Steve Silverman, who owns one of the largest chunks of Amgen stock held by an individual investor. “Kevin put most of them on the board himself. If he’s getting paid too much — and he certainly is — they’re not going to say so.”
Perfect free market solution:

If you feel a company's board is incompetent and does not deserve your money, do not invest in them or support them with your business.

See? Not so hard now is it?
 

iamwhatiseem

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Obviously not.
Jeffery "lay em off" Immelt would have to pay G.E. if they were paid by performance.
 
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How does one legally limit the CEO pay if the stockholders do not object? You could require companies above a certain profit threshold to distribute information concerning the salaries the top management execs relative to their industry and require a majority approval of compensation packages. But if they approve it, so be it.

For private companies, it should be whatever they can earn subject to the law of course. I haven't seen dara for private vs public CEOs, but I'm guessing the private ones are far less profitable and top management is not as highly compensated. But whatever they can pay themselves and still stay in business is on them.

In either case, the gov't has no business intervening, outside of ensuring no illegalities or unfair business practices are in play. If the information is diseminated and is accurate, thent he gov't has no further right to interfere.
Government should NOT be limiting pay. But the problem is that shareholders have little say in how corporations are run. Take a look at the Board of Directors almost any company in the Fortune 500, and you will be hard pressed to find two, or even one, major shareholder on the board. And that's because of how corporations are structured in America.

Most directors mean well and want to do the best, but they are rife with conflicts.

A simple one - why is the Chairman of the Board not always a separate position from the CEO? That, in itself, is a serious conflict. Why aren't nomination committees and compensation committees at the very least populated exclusively by independent directors? In Sweden, the four largest shareholders are part of the nomination committee. Here in America, the nomination committee often has insiders and loyalists to the CEO, making it more likely that independent directors will not be on the committee.

People often make the assumption that the interests of corporate America and management are the same. They often are not. Managements' first loyalty is to itself, not to shareholders or anyone else. Managements often want to do their best, but when their interests cross with shareholders, it is very difficult for shareholders to do anything about it. That should change.



Re: The solution is to give shareholders more rights. Shareholders should have a much greater say on how their money is spent by those who often have differing incentives than they.
 
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kwc57

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There is virtually no relationship between relative CEO pay and relative corporate performance. One reason is because CEO's aren't paid based on performance. They are paid relative to how other CEOs are paid.
You do realize this happens with many jobs across the board don't you. XYZ Co. that build widgets checks and keeps their pay scale in line with ABC Corp. that makes widgets too. No one wants to be under or over so they talk to one another about what they pay. Now, what they do to reward performance is use a pay scale within each range where the bottom might be $30 and the top is $35k.
 

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