The Highest-Paid CEOs Are The Worst Performers, New Study Says(forbes.com)
forbes.com
The Highest-Paid CEOs Are The Worst Performers, New Study Says
http://www.forbes.com/sites/susanadams/2014/06/16/the-highest-paid-ceos-are-the-worst-performers-new-study-says/
136 comments
I thought of this as well, and I was bothered that the authors did not. (At least the author of the Forbes piece - I could not access the research paper.) The author of the Forbes piece immediately jumped into explaining the effect assuming causation, which I was not convinced has been established.
To be clear, I find it reasonable that there could be causation. But we still need evidence to support that conclusion.
To be clear, I find it reasonable that there could be causation. But we still need evidence to support that conclusion.
The paper itself covered a lot of ground (including "firm size and prior stock performance, especially over the past three years, are significant predictors of both excess cash and incentive compensation"; the results confirm than recent stock performance is positively correlated with CEO pay). It didn't however give any detailed consideration to the obvious other hypotheses:
(i) Far from being overconfident about their decisions, top paid CEOs (and the boards that negotiate their pay packet) are actually more conservative than the market about the future prospects for the stock, so are willing to agree bigger stock-based incentive packages as a result. CEOs generally should have more insight into the workings of their firms than Wall Street analysts, of course...
(ii) If a CEO's pay packet at time t predicts good stock performance since t-3 and bad stock performance up to t+3 might it be that their ability to prevent the firm's stock price reverting to the mean is limited (even if they're actually still doing a good job... and receiving acknowledgement in the form of pay packets more focused on that difficulty)
There's also [iii] The decisions the CEO makes is not even slightly affected by their pay structure but high CEO compensation packages is a good proxy for lack of board oversight
but that's a lot closer (and to a large extent compatible with) the authors' hypothesis about overconfidence
(i) Far from being overconfident about their decisions, top paid CEOs (and the boards that negotiate their pay packet) are actually more conservative than the market about the future prospects for the stock, so are willing to agree bigger stock-based incentive packages as a result. CEOs generally should have more insight into the workings of their firms than Wall Street analysts, of course...
(ii) If a CEO's pay packet at time t predicts good stock performance since t-3 and bad stock performance up to t+3 might it be that their ability to prevent the firm's stock price reverting to the mean is limited (even if they're actually still doing a good job... and receiving acknowledgement in the form of pay packets more focused on that difficulty)
There's also [iii] The decisions the CEO makes is not even slightly affected by their pay structure but high CEO compensation packages is a good proxy for lack of board oversight
but that's a lot closer (and to a large extent compatible with) the authors' hypothesis about overconfidence
Maybe regression to the mean also explains it?
Firm has a good three years so CEO pay goes up. But that performance was just random chance and the true mean (and future performance) is lower
Firm has a good three years so CEO pay goes up. But that performance was just random chance and the true mean (and future performance) is lower
>This may be a correlation-vs-causation effect. It's possible that companies that are in poor markets and likely to do poorly in the next few years have to pay more to attract qualified CEO candidates, because good executives realize the shit the company is in and don't want to take the risk of a failure on their resume without being compensated significantly for it.
I was also thinking that it could be the correlation vs causation effect, but I think it may have more to do with the fact that the highest paid CEOs are usually going to be found working at gigantic companies that are struggling to continue to grow.
I was also thinking that it could be the correlation vs causation effect, but I think it may have more to do with the fact that the highest paid CEOs are usually going to be found working at gigantic companies that are struggling to continue to grow.
Yes I think this is a simpler correlation. Bigger established companies have more cash to pay the CEO but less room for growth. The companies themselves are probably more concerned with minimizing risk and holding position - it might be a better study to compare CEO pay with board evaluation of performance.
I agree. It's unfortunate that whenever you see media coverage of a study like this, the safe assumption is bad interpretation of the data, bad data, small sample sizes and the like. It could also be true. We're such apes.
You feel like you need to interrogate them to see what they're missing or hiding. Is this just a product of pay in certain industries?
The article mentions poorly performing banks. Bank CEO markets are competitive. There are a lot of them. They move and they have options in government, think task and such. Banks also happen to be on a bad run. Tech OTOH is doing well. We're on a founder-CEO trend and most of them are rich of founder stack, not salaries. Stock is more common as a compensation. You're more likely to find $1 salaries in tech companies.
Could the story really be more about industries, their compensation norms and recent performance? Could it be about founders vs hired guns? Could your (sounds plausible) reasoning be true, bad companies need to pay CEOs higher salaries. I'm not claiming it is, just pointing out how unfortunate it is that we can't say "Forbes, University of Utah. They must have eliminated those. Their conclusion must be a likely one.
"How could this be? In a word, overconfidence. CEOs who get paid huge amounts tend to think less critically about their decisions." - really?
On second though, your reasoning must be correct. Stock based compensation is much more attractive in a company/industry that's making gains. Warren Buffet or Larry Ellison can be compensated by owning stock, options or similar. If a stock is flat, those kinds of incentive packages are worth less so it needs to be made up in salary.
You feel like you need to interrogate them to see what they're missing or hiding. Is this just a product of pay in certain industries?
The article mentions poorly performing banks. Bank CEO markets are competitive. There are a lot of them. They move and they have options in government, think task and such. Banks also happen to be on a bad run. Tech OTOH is doing well. We're on a founder-CEO trend and most of them are rich of founder stack, not salaries. Stock is more common as a compensation. You're more likely to find $1 salaries in tech companies.
Could the story really be more about industries, their compensation norms and recent performance? Could it be about founders vs hired guns? Could your (sounds plausible) reasoning be true, bad companies need to pay CEOs higher salaries. I'm not claiming it is, just pointing out how unfortunate it is that we can't say "Forbes, University of Utah. They must have eliminated those. Their conclusion must be a likely one.
"How could this be? In a word, overconfidence. CEOs who get paid huge amounts tend to think less critically about their decisions." - really?
On second though, your reasoning must be correct. Stock based compensation is much more attractive in a company/industry that's making gains. Warren Buffet or Larry Ellison can be compensated by owning stock, options or similar. If a stock is flat, those kinds of incentive packages are worth less so it needs to be made up in salary.
I'd argue it's not.
People that are paid most to do a job that isn't repetitive manual labor have worst performance scores, time and time again.
So unless CEOs are paid to manually bolt things or throws ball into a hoop, they probably aren't doing well because, in part, they are given money. Money introduces fear (i.e. fear that you won't make enough money or lose your position with lots of money) and that leads to tunnel vision.
People give more performance if you give them more autonomy, mastery and purpose.
https://www.youtube.com/watch?v=u6XAPnuFjJc
People that are paid most to do a job that isn't repetitive manual labor have worst performance scores, time and time again.
So unless CEOs are paid to manually bolt things or throws ball into a hoop, they probably aren't doing well because, in part, they are given money. Money introduces fear (i.e. fear that you won't make enough money or lose your position with lots of money) and that leads to tunnel vision.
People give more performance if you give them more autonomy, mastery and purpose.
https://www.youtube.com/watch?v=u6XAPnuFjJc
I also immediately though of that talk. It makes sense that it also applies to CEOs.
I would argue the opposite with so much money on at your finger tips you are more prone to bad decisions because you are not invested enough in the outcome.
You ear more in a year than you can spend in a life time what are the chances of you looking a every deal very attentively?
You do the absolute minimum to maintain your position but you're not driven enough to put more effort into it.
You ear more in a year than you can spend in a life time what are the chances of you looking a every deal very attentively?
You do the absolute minimum to maintain your position but you're not driven enough to put more effort into it.
Ok, so I do believe that CEO's are usually overpaid with regard to their performance. That being said, I am not convinced by the methodology used in the study, specifically the period used for measuring the performance: 3 years. It sounds like a lot of time, but actually, I would expect a truly great CEO to undertake projects with a 5 years or more horizon. There's this great interview of Bezos discussing the point of focusing on quarterly results vs long term. So an alternative explanation for the findings could be: the highest paid CEOs invest in 5-10 years projects, so their results after 3 years are below average.
Again, I repeat that even before reading the study, I intuitively agreed with their conclusion, but I'm not so sure about their argument to prove it
Again, I repeat that even before reading the study, I intuitively agreed with their conclusion, but I'm not so sure about their argument to prove it
Normally I would agree with you, but the average tenure of a Fortune 500 CEO is less than 4 years. If you raise the bar for period of performance, you're filtering out the bozos who go away quickly.
The way I read it that if you're not a superstar, you're investing lots of time horse trading and kissing babies to get the big bucks. That time would probably be better spent doing work productive to the business.
The way I read it that if you're not a superstar, you're investing lots of time horse trading and kissing babies to get the big bucks. That time would probably be better spent doing work productive to the business.
Looking at the first 3 years seems almost doomed to failure. It seems to me that it's pretty likely that a new CEO is going to be taking a company in a direction at least slightly different.
That means cutting out some projects may have been just about to pay off, while at the same time embarking on new ventures that won't bear fruit for some time.
One might interpret these results to say, "the highest-paid CEOs are engaging in the most expensive change for their firms". It's only natural that significant change is both forgoing some income that would have been realized soon, and creating risks for what's in the short-to-medium term while they look to the horizon.
This is all to be expected, and doesn't necessarily say anything about the amount of value they create in the long term.
That means cutting out some projects may have been just about to pay off, while at the same time embarking on new ventures that won't bear fruit for some time.
One might interpret these results to say, "the highest-paid CEOs are engaging in the most expensive change for their firms". It's only natural that significant change is both forgoing some income that would have been realized soon, and creating risks for what's in the short-to-medium term while they look to the horizon.
This is all to be expected, and doesn't necessarily say anything about the amount of value they create in the long term.
The study should also consider the company's performance before the CEO takes over. If a CEO is coming in to rescue a company that's in trouble, they might expect to be compensated for the additional risk they are taking on.
Stock prices are based on the market's view of the future. You don't evaluate a CEO like a middle manager. If he cuts some critical program for strategic reasoning, the market will either punish him or reward him based on the future outlook.
Stock prices are animal herd logic, not science. See e.g.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=670404
If you believe that business should have long-term horizons and not simply be a machine for organising the maximum possible quarterly profit, stock markets in their current form are one of the least efficient ways to organise labor and capital.
Inflated CEO pay is only one symptom of this.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=670404
If you believe that business should have long-term horizons and not simply be a machine for organising the maximum possible quarterly profit, stock markets in their current form are one of the least efficient ways to organise labor and capital.
Inflated CEO pay is only one symptom of this.
Stock prices are animal herd logic, not science
That's not how I understand your link. The study suggests to me that analyst recommendations are unreliable predictors of short-term gain. And it certainly does not show that changes in a company's overall market capitalization are based on a herd mentality.
Note that it says that those rebalancing according to advisors achieved higher terminal wealth, but lower risk-adjusted return. Most importantly, they did do better in the end. But adjusted for risk, it's worse. This suggests to me that the analysts usually do pretty well, but when they flub it, it's a doozy.
That's not how I understand your link. The study suggests to me that analyst recommendations are unreliable predictors of short-term gain. And it certainly does not show that changes in a company's overall market capitalization are based on a herd mentality.
Note that it says that those rebalancing according to advisors achieved higher terminal wealth, but lower risk-adjusted return. Most importantly, they did do better in the end. But adjusted for risk, it's worse. This suggests to me that the analysts usually do pretty well, but when they flub it, it's a doozy.
Stock markets also consider risk, so when a new CEO pushes for a new direction, that's penalized initially even if it's the correct long term approach because more is unknown.
A couple issues. Poor CEO's probably don't last 5 years. I'd suspect a strong correlation to performance and CEO's "horizon". In that those CEO's focused on next years or next quarters numbers are likely to thave poor (longterm) performance. Superstars such as Bezos or Musk are probably anomalies and not useful in studying CEO performance in general.
Bezos and Musk are also founders. The basic problem with CEOs is that they pose a huge agency issue: they are supposed to be appointed as agents of the owners who are themselves represented by the Board of Directors. However, no one has ever found a way to provide effective oversight to ensure that CEOs act in the interests of the owners rather than in their own interests.
Attempts to tie CEO interests to owner interests by tying compensation to the company's performance have thus far failed, mostly because a) the fraction of compensation isn't sufficient to overcome the CEOs self-serving motivation or b) the specific tying system can be gamed to the CEO's advantage.
Furthermore, there is an asymmetry in the degree of interest between the parties: CEOs have a very large interest in maximizing their own compensation, while shareholders see CEO compensation as one expense amongst many others, and as such are less interested in it.
These issues have been known for a long time, and again: no one has come up with a viable answer. Anything anyone who is posting here thinks of has almost certainly been thought of before, tried, and seen to fail.
Attempts to tie CEO interests to owner interests by tying compensation to the company's performance have thus far failed, mostly because a) the fraction of compensation isn't sufficient to overcome the CEOs self-serving motivation or b) the specific tying system can be gamed to the CEO's advantage.
Furthermore, there is an asymmetry in the degree of interest between the parties: CEOs have a very large interest in maximizing their own compensation, while shareholders see CEO compensation as one expense amongst many others, and as such are less interested in it.
These issues have been known for a long time, and again: no one has come up with a viable answer. Anything anyone who is posting here thinks of has almost certainly been thought of before, tried, and seen to fail.
"Attempts to tie CEO interests to owner interests by tying compensation to the company's performance have thus far failed, mostly because a) the fraction of compensation isn't sufficient to overcome the CEOs self-serving motivation or b) the specific tying system can be gamed to the CEO's advantage."
and/or c) extrinsic motivators aren't effective for non-mechanical work.
http://www.ted.com/talks/dan_pink_on_motivation
and/or c) extrinsic motivators aren't effective for non-mechanical work.
http://www.ted.com/talks/dan_pink_on_motivation
What Dan Pink describes is that for non-mechanical work, extrinsic motivation is ineffective in improving performance: how quickly or accurately or insightfully or imaginatively one accomplishes a particular task.
But the question with CEO pay is a bit different, and I don't think the studies Pink refers to say anything about it: what can you do to encourage CEOs to act in the best interests of the companies they manage?
This isn't a matter of, e.g., whether they notice opportunities to attack a previously unaddressed market -- which is the kind of thing for which Pink finds extrinsic motivation isn't good at improving. It's a matter of whether, having noticed such an opportunity, they further notice that taking it would be good for the company but bad for them personally because, e.g., it would have short-term costs that would drive down the value of the shares they were hoping to sell next year to buy a new house.
In which case, the findings Pink describes might actually be good news: the prospect of personal gain may be ineffective in making unscrupulous CEOs good at spotting opportunities to screw their company over to make a quick buck.
But the question with CEO pay is a bit different, and I don't think the studies Pink refers to say anything about it: what can you do to encourage CEOs to act in the best interests of the companies they manage?
This isn't a matter of, e.g., whether they notice opportunities to attack a previously unaddressed market -- which is the kind of thing for which Pink finds extrinsic motivation isn't good at improving. It's a matter of whether, having noticed such an opportunity, they further notice that taking it would be good for the company but bad for them personally because, e.g., it would have short-term costs that would drive down the value of the shares they were hoping to sell next year to buy a new house.
In which case, the findings Pink describes might actually be good news: the prospect of personal gain may be ineffective in making unscrupulous CEOs good at spotting opportunities to screw their company over to make a quick buck.
I wonder if corporations that uses entirely non voting stock exist.
Who would pick the directors?
You'd be surprised how long poor CEOs can last. I worked for one large company where the market cap went to a 1/10th of what the company has spent on acquisitions alone during the CEO's reign and a continuous sequence of questionable business decisions that included laying off pretty much anyone who could have been instrumental in helping the company recover. I think there are many other examples.
A CEO can always blame the economy, blame the market, blame the weather, blame their predecessors or otherwise spin things in a favorable way. They can sell a story of tough times needed to make a turnaround. Sometimes there will be some secret scratching behind the back (I'm on your board, you're on my board). There's the cognitive dissonance on the board side of things, we've selected this guy therefore he must be good. etc.
As others have said, the incentives are set in a way that a CEO looks primarly after his own interests. It's safe to assume that CEOs that make a lot of money are even better at looking after their own interests. They are also very good at convincing others that they're not looking after their own interests.
A CEO can always blame the economy, blame the market, blame the weather, blame their predecessors or otherwise spin things in a favorable way. They can sell a story of tough times needed to make a turnaround. Sometimes there will be some secret scratching behind the back (I'm on your board, you're on my board). There's the cognitive dissonance on the board side of things, we've selected this guy therefore he must be good. etc.
As others have said, the incentives are set in a way that a CEO looks primarly after his own interests. It's safe to assume that CEOs that make a lot of money are even better at looking after their own interests. They are also very good at convincing others that they're not looking after their own interests.
I think this is the most interesting excerpt from the study:
"The level of incentive compensation is significantly negatively related to the forward ROA, while the level of cash compensation is positively related to the level of ROA.
Overall, we conclude that our results seem most consistent with the hypothesis that overconfident CEOs accept large amounts of incentive pay and consequently engage in value destroying activities that translate into future reductions in returns and firm performance. "
"The level of incentive compensation is significantly negatively related to the forward ROA, while the level of cash compensation is positively related to the level of ROA.
Overall, we conclude that our results seem most consistent with the hypothesis that overconfident CEOs accept large amounts of incentive pay and consequently engage in value destroying activities that translate into future reductions in returns and firm performance. "
I wonder about that "overconfident" label, and it might be possible to tease various effects out of the data.
Consider two possibilities:
1) CEOs with large incentive pay are irrationally confident in the success of risky policies
2) CEOs with large incentive pay are behaving like economically rational agents... betting someone else's money.
That is, incentive pay is more like a free pass to a casino where your losses are made good but you keep some fraction of your winnings. Under those circumstances taking large risks may be the most rational thing to do, IF the cash component of the CEO's compensation is sufficient to keep them in caviar and summer homes while they gamble the firm's money away.
Consider two possibilities:
1) CEOs with large incentive pay are irrationally confident in the success of risky policies
2) CEOs with large incentive pay are behaving like economically rational agents... betting someone else's money.
That is, incentive pay is more like a free pass to a casino where your losses are made good but you keep some fraction of your winnings. Under those circumstances taking large risks may be the most rational thing to do, IF the cash component of the CEO's compensation is sufficient to keep them in caviar and summer homes while they gamble the firm's money away.
Your second possibility covers not only executives who partake in high-risk gambles but also executives who deliberately bankrupt their company for personal profit. A canny executive doesn't rob the firm by dipping his fingers in the till but by, for instance, loading the firm with gold-plated rubbish and extracting a personal profit in the form of compensation, stock-options etc, before the sheen wears off.
Small problem: the incentive compensation is mostly options, and the way that package is measured is based on the value of the options at that moment in time. Options with high valuations are effectively pay for past performance that is consequently now worth something.
I'm skeptical because it sounds like this effect should be tradeable, unless they're using some measure of shareholder returns which doesn't imply that you could short-sell high-paid-CEO equities and buy median-paid-CEO equities and get an excess return. In other words, it sounds like this study is postulating an exploitably inefficient market, unless this kind of data only recently became available. http://lesswrong.com/lw/yv/markets_are_antiinductive/
To be clear, I'm very willing to believe that the companies with the highest-paid CEOs have generally poor governance and will antiperform on some appropriate metric, like price-to-book. But that metric shouldn't be equity price changes because CEO pay is public info, people are already speculating about it as a negative sign, and the market should already be taking that into account and pricing such shares lower (meaning that the returns cost less, hence such stocks should return the market rate, albeit perhaps with greater volatility).
To be clear, I'm very willing to believe that the companies with the highest-paid CEOs have generally poor governance and will antiperform on some appropriate metric, like price-to-book. But that metric shouldn't be equity price changes because CEO pay is public info, people are already speculating about it as a negative sign, and the market should already be taking that into account and pricing such shares lower (meaning that the returns cost less, hence such stocks should return the market rate, albeit perhaps with greater volatility).
It doesn't matter that the effect is tradable. What matters is that there is no possible arbitrage i.e. a way to make money with a 100% probability. For example, would you enter a bet in which you have a 50% chance of loosing $1000 and a 50% chance of making $1001 if you can enter it only once a year?
There are many many observable patterns that contradict the efficient market hypothesis amongst which:
- historical option volatility is lower than implied vol - you can make money by writing options.
- sell in may and go away strategy - you can make money (and beat the index) by being long the SP500 only between october-may
- strong contango in the VIX futures market - you can make money by shorting a volatility ETN like VXX that rolls near-maturation future contracts.
- mean-reversion on the second day after an earnings release - you can make money by going short if the stock price rises after the earnings call or vice-versa
In the end, what matters is how much risk (volatility, max drawdown...) you're willing to take for superior returns. That is often summarized by the information ratio of your strategy which is equal to (return of your strat - return of the bechmark)/vol(difference in returns).
There are many many observable patterns that contradict the efficient market hypothesis amongst which:
- historical option volatility is lower than implied vol - you can make money by writing options.
- sell in may and go away strategy - you can make money (and beat the index) by being long the SP500 only between october-may
- strong contango in the VIX futures market - you can make money by shorting a volatility ETN like VXX that rolls near-maturation future contracts.
- mean-reversion on the second day after an earnings release - you can make money by going short if the stock price rises after the earnings call or vice-versa
In the end, what matters is how much risk (volatility, max drawdown...) you're willing to take for superior returns. That is often summarized by the information ratio of your strategy which is equal to (return of your strat - return of the bechmark)/vol(difference in returns).
Yes, if this was a very high volatility bet with a low payout that can't be easily repeated it might not be arbitraged away efficiently.
But this should let you make predictions about literally every single company in the world if it's true. You can take it thousands of times, not once per year. So I don't think the situation you're positing applies here.
If CEO salary was a signal as to equity performance, you could make a "CEO salary weighted S&P index" that should outperform the S&P consistently. Which we don't observe. Therefore it probably isn't a signal. Or if it is a signal, it's very weak.
But this should let you make predictions about literally every single company in the world if it's true. You can take it thousands of times, not once per year. So I don't think the situation you're positing applies here.
If CEO salary was a signal as to equity performance, you could make a "CEO salary weighted S&P index" that should outperform the S&P consistently. Which we don't observe. Therefore it probably isn't a signal. Or if it is a signal, it's very weak.
In short, you're saying that by diversifying your holdings across thousands of companies, you can statistically arbitrage the signal but it is not true.
You could make predictions for every company in the world but you'd need both the signal to be right most of time, over any time period, be uncorrelated across companies and have an excess return collectable over a period short enough. If any of these conditions are not met, you will not be able to statistically arbitrage it. Take options for example, writing them (selling them) is a strategy you can backtest and it has positive return on average. You can write options on thousand of stocks, every week. But because volatility - on which the option price depends - is correlated across stocks, this strategy will incur a large loss on a financial crisis. Your diversification will not matter.
Also, you say that we don't observe the signal but you can't know, maybe we do. There are tons of simpler signals - some of which I cited above - that we still observe.
You could make predictions for every company in the world but you'd need both the signal to be right most of time, over any time period, be uncorrelated across companies and have an excess return collectable over a period short enough. If any of these conditions are not met, you will not be able to statistically arbitrage it. Take options for example, writing them (selling them) is a strategy you can backtest and it has positive return on average. You can write options on thousand of stocks, every week. But because volatility - on which the option price depends - is correlated across stocks, this strategy will incur a large loss on a financial crisis. Your diversification will not matter.
Also, you say that we don't observe the signal but you can't know, maybe we do. There are tons of simpler signals - some of which I cited above - that we still observe.
To be tradable is only has to be right >50% of the time.
False. Depends on the return when right vs. return when wrong.
The treasurer of my nonprofit who worked the short book at a hedge fund for a bit, commented on using this effect in his analyses, although usually for him it was lavish compensation packages that don't count stock-based compensation.
I'd worry that the inclusion of stock-based compensation introduces a different sort of artefact (a time-bias). By the nature of our bubblicious economy, CEOs in general are going to enjoy abnormally high stock-based returns in the 3-year run up to a stock market crash.
I'd worry that the inclusion of stock-based compensation introduces a different sort of artefact (a time-bias). By the nature of our bubblicious economy, CEOs in general are going to enjoy abnormally high stock-based returns in the 3-year run up to a stock market crash.
I pretty much guarantee that if you ran the numbers with intent to profit off this phenomenon, you'd find that its predictive value is null. A commenter down below speculated that it sounds a lot like simple regression to the mean.
I'm really curious about the relationship of CEO compensation and employee satisfaction/morale in companies. I have lost count of the number of times I've heard about a CEO, COO or CFO getting 8 figure salaries while the rank and file employees had to forego their bonuses in a touch year. I cannot begin to imagine how devastating that knowledge is to employee morale.
The best I remember is that a Danish bank (I think it was "Nordea" or "Danske Bank", but I'm not sure and my search-karma seems to have gone for the day) had a CEO who got a huge bonus for meeting his goals in making a profit back in 2009 or 2010.
The way he did that, though, was to fire 30% of the staff (and branches) and living off the profit from the hard work those 30% did the previous years - the next years they had bigger and bigger deficits, because they couldn't keep living off previous years loans.
The way he did that, though, was to fire 30% of the staff (and branches) and living off the profit from the hard work those 30% did the previous years - the next years they had bigger and bigger deficits, because they couldn't keep living off previous years loans.
I went through it last year. Our company didn't make money so no bonuses for us while the CEO got a handsome package of some $25 million.
It's pretty terrible to go through. Even if you didn't think the CEO has done a terrible job (I officially have no comment on the matter), it was still terrible.
It's pretty terrible to go through. Even if you didn't think the CEO has done a terrible job (I officially have no comment on the matter), it was still terrible.
Is it possible that what we're seeing here is a reversion to the mean[1] - CEOs who do particularly well some years get large pay packages, and then when their performance reverts to the mean in subsequent years they end up overpaid relative to performance?
[1] Thinking, Fast and Slow by Daniel Kahneman
[1] Thinking, Fast and Slow by Daniel Kahneman
Probably!
Also perhaps, Winner's Curse: those who've paid the most in a competitive process are most often those who overestimated the value received.
http://en.wikipedia.org/wiki/Winner%27s_curse
And Tournament Theory: compensation is often based not on proportionate productivity, but rank order, which may be easier to measure, and serves as probabilistic-motivation for other workers competing for the top spot.
http://en.wikipedia.org/wiki/Tournament_theory
Also perhaps, Winner's Curse: those who've paid the most in a competitive process are most often those who overestimated the value received.
http://en.wikipedia.org/wiki/Winner%27s_curse
And Tournament Theory: compensation is often based not on proportionate productivity, but rank order, which may be easier to measure, and serves as probabilistic-motivation for other workers competing for the top spot.
http://en.wikipedia.org/wiki/Tournament_theory
You beat me to it. Another way to state it would be that having a richly-paid CEO is a lagging indicator; or the companies with the resources to have a trophy CEO are likely already topped out and running up against the law of large numbers. Imagine being Tim Cook, CEO of Apple: he ought to expect high pay for such a prestigious job (I haven't looked it up), but continuing to grow the stock price at past rates would be next to impossible.
Yes, but they are not comparing future performance to past performance, but rather to that of similar firms.
I'm sure they ruled out the more obvious confounding variables. All else being equal, you would expect a result like they got, based on the null hypothesis that expensive CEOs are at least average among CEOs, combined with the suspicion that their hiring is not a random event. Factor in that the researchers were undoubtedly biased in favor of the outcome they found, and a lot of skepticism is justified in making sense of this.
I don't see how it can simultaneously be the case that:
Though Cooper concedes that there could be exceptions at
specific companies (the study didn’t measure individual
firms)
How could this be? In a word, overconfidence. CEOs who get
paid huge amounts tend to think less critically about their
decisions. “They ignore dis-confirming information and just
think that they’re right,” says Cooper.
Interestingly, Peter Thiel wrote that Startup success is correlated with CEO pay (or the lack there-of)
http://techcrunch.com/2008/09/08/peter-thiel-best-predictor-...
http://techcrunch.com/2008/09/08/peter-thiel-best-predictor-...
Thiel's idea is fine if you're a kid eating ramen and living with your parents, but it is completely wrong for people who already have experience, and/or have families to support. I actually lost an investment because the investor thought I should not pay myself at all while trying to build the business.
>>I actually lost an investment because the investor thought I should not pay myself at all while trying to build the business.
That is absurd, they don't deserve to be investors. You receive money in exchange for equity. The money is used to run the company and build value for the investors. Providing salary to everyone who is engaged in building value must be part of the equation. Otherwise if you think about it, in extreme case you will give away your entire company to build value for investors and you will get nothing in the end.
That is absurd, they don't deserve to be investors. You receive money in exchange for equity. The money is used to run the company and build value for the investors. Providing salary to everyone who is engaged in building value must be part of the equation. Otherwise if you think about it, in extreme case you will give away your entire company to build value for investors and you will get nothing in the end.
Tell me about it. He actually said to me that instead of making an investment, he should own the company and would just pay me a salary to build the business. I respectfully declined.
You're a founder, so none of this should be shocking, early stage startups are cash strapped, and cash-in-the-bank is the 2nd most valuable commodity a company has, after it's people. In fact, the #1 reasons startup's will fail, will because they run out of money.
Thus, a CEO who doesn't treat their cash as the valuable resource it is, is just putting an unnecessary burden on their company.
Peter Thiel isn't advocating paying yourself nothing. His point (and data[1] backs this up), that CEO's making a high salary is a pretty good indicator of Startup that will fail.
If you need a high salary, then being a Founder/CEO probably isn't the right move. You're putting a burden on the company because of your life style choices.
Conversely, if you don't pay yourself anything, you're going to spend too much time dealing with the pain of not making ends meet, instead spending your energy growing your company.
[1] http://blog.startupcompass.co/73-percent-of-startup-founders...
Thus, a CEO who doesn't treat their cash as the valuable resource it is, is just putting an unnecessary burden on their company.
Peter Thiel isn't advocating paying yourself nothing. His point (and data[1] backs this up), that CEO's making a high salary is a pretty good indicator of Startup that will fail.
If you need a high salary, then being a Founder/CEO probably isn't the right move. You're putting a burden on the company because of your life style choices.
Conversely, if you don't pay yourself anything, you're going to spend too much time dealing with the pain of not making ends meet, instead spending your energy growing your company.
[1] http://blog.startupcompass.co/73-percent-of-startup-founders...
Your making assumptions that don't hold up. If you have 1+M in the bank then paying yourself nothing is not a major issue. If your company just got 5+M in funding paying yourself 200k/year is not going to make much difference.
Often paying yourself nothing makes things look better than they are which can be a bad thing. A slightly profitable 3 person company that pays it's founders nothing is not actually profitable.
In the end what you make as CEO is often more important from a signaling standpoint than a survival one. Investors often have the mindset where they don't invest in companies where the CEO makes more than X or less than Y.
Often paying yourself nothing makes things look better than they are which can be a bad thing. A slightly profitable 3 person company that pays it's founders nothing is not actually profitable.
In the end what you make as CEO is often more important from a signaling standpoint than a survival one. Investors often have the mindset where they don't invest in companies where the CEO makes more than X or less than Y.
It's not the money so much as the signalling effect to potential investors. You presumably have the best knowledge about your own ability to profitably employ capital. If you take out a lot of money to pay yourself, that implies that you believe that the business's current cash is worth more to you as personal income than it is in business equity. What does that say to people who hold only equity and are supplying the cash?
If I had investors and free business cash flow, I'd pay myself only enough to break-even on personal expenses. The reason is that I'd also own equity in the business, and any money invested in the business could presumably earn a bigger return than if I took that money out of the business and invested it elsewhere. If that assumption doesn't hold, I have no business being an entrepreneur, because it is more economically rational for me to take a fat-paying job at Google or in finance, and then stick my excess savings into index funds.
If I had investors and free business cash flow, I'd pay myself only enough to break-even on personal expenses. The reason is that I'd also own equity in the business, and any money invested in the business could presumably earn a bigger return than if I took that money out of the business and invested it elsewhere. If that assumption doesn't hold, I have no business being an entrepreneur, because it is more economically rational for me to take a fat-paying job at Google or in finance, and then stick my excess savings into index funds.
Founders don't know how to employ capital profitably because for any individual startup the best course of action is to return the funds to the shareholder because it's a virtually assured failure.
However, in aggregate the serious performers outweigh the losses from the 99% failure rate.
So given that I am about to give 5 years of my time to something that is most likely a failure I'd like some compensation for my time, just like every VC takes 2% to flush the LPs money down the toilet, and 20% when they return.
However, in aggregate the serious performers outweigh the losses from the 99% failure rate.
So given that I am about to give 5 years of my time to something that is most likely a failure I'd like some compensation for my time, just like every VC takes 2% to flush the LPs money down the toilet, and 20% when they return.
Think of how terrible that sounds from an investor's perspective. "I don't know how to employ capital profitably because my best course of action is to return my funds to you because my startup is a virtually assured failure." Would you invest in a startup that just told you that?
If you're going to bother founding a startup, you should have some reason to believe that you are in the 1% that is going to be a success. You might be wrong in that belief, and that's why startup success continues to be fairly rare, but if you don't even have a reason to believe that much you might as well pack up the startup, get a good-paying job, and invest the money you earn.
If you're going to bother founding a startup, you should have some reason to believe that you are in the 1% that is going to be a success. You might be wrong in that belief, and that's why startup success continues to be fairly rare, but if you don't even have a reason to believe that much you might as well pack up the startup, get a good-paying job, and invest the money you earn.
Being honest and forthright goes a lot further than you think. Startups have risk, outline the risk, and ask for what you want.
You don't need the thousands of investors who want you to work for free, you need one who believes in the business enough to think the CEO is worth being paid. If the CEO isn't worth being paid the startup isn't worth investing in.
You don't need the thousands of investors who want you to work for free, you need one who believes in the business enough to think the CEO is worth being paid. If the CEO isn't worth being paid the startup isn't worth investing in.
You can believe you have a chance to be in the 1% of success stories while being pragmatic about the fact that you're likely not going to be.
The point is there are no simple hard and fast rules. If you made 500k last year and do a start-up that only pays you 200k your taking a bigger pay cut than a 20 something that's paying themselves nothing. Some people have alimony payments that hit 100k.
Don't forget it's not just the clueless, neurosurgeons and CEO's also do start-ups.
Don't forget it's not just the clueless, neurosurgeons and CEO's also do start-ups.
What you're saying makes no sense.
Investors put money into businesses to grow the business, not support a formerly wealthy CEO's standard of lifestyle.
Investors put money into businesses to grow the business, not support a formerly wealthy CEO's standard of lifestyle.
It's not about supporting a lifestyle it's about having a CEO willing to keep working there. Finding a competent replacement for significantly under 200k is unlikely. Sure, they might take stock but that's not 'free'.
This is such a killer point and neatly sums it up.
This is also why I think basic income would be so great for a startup CEO. If there is a sensible government system for guaranteeing my survival, I can put all the business revenue back into the business. I'll grow more quickly.
This is also why I think basic income would be so great for a startup CEO. If there is a sensible government system for guaranteeing my survival, I can put all the business revenue back into the business. I'll grow more quickly.
I reread what I wrote, and I don't see where I advocated paying yourself nothing.
If you have $5+m in the bank, you're probably post-A, which means you have the funding to pay the founding team salaries, perhaps below market.
If you have 5m in the bank and you're paying yourself 200k a year, I sincerely question the logic of the board, and the CEO. That extra $80-100k can go to hire another person.
What is going to benefit the company more?
If you have $5+m in the bank, you're probably post-A, which means you have the funding to pay the founding team salaries, perhaps below market.
If you have 5m in the bank and you're paying yourself 200k a year, I sincerely question the logic of the board, and the CEO. That extra $80-100k can go to hire another person.
What is going to benefit the company more?
That CEO might not be able to take the job without that extra $100k. People buy houses; get loans; get families; split up and end up paying alimony; incur all kinds of other costs. It doesn't take a lot for someone who comes from previous high paying jobs to have commitments that makes $200k/year tight.
I agree with your overall point that it's a red flag if the CEO demands lots more than they need (and they should be prepared for questions about why they're asking for a certain salary), but drawing a specific line does not work.
I agree with your overall point that it's a red flag if the CEO demands lots more than they need (and they should be prepared for questions about why they're asking for a certain salary), but drawing a specific line does not work.
Paying 1 new person 100k costs more than paying 1 person 100k extra.
2 really productive people are more productive than 1 really productive person.
What is your point?
What is your point?
100K generally pays for about 5 months of a highly talented programmers salary+ overhead. It may depending on funding levels extend a startups runway by less than 1 week.
Compare successful Authors and find making 200k/year is far from the top. Why? Because sometimes highly productive people doing the same task are less than 10% as efficient as others. Dentists, Athletes, Programmers, Lawyers, Sales People, Architect, and most other complex jobs have a huge range of talent once you cross highly productive.
EX: JK Rowling made well over 50 million per year working on HP. 1% of that is 500k which is still extremely high for an author.
Compare successful Authors and find making 200k/year is far from the top. Why? Because sometimes highly productive people doing the same task are less than 10% as efficient as others. Dentists, Athletes, Programmers, Lawyers, Sales People, Architect, and most other complex jobs have a huge range of talent once you cross highly productive.
EX: JK Rowling made well over 50 million per year working on HP. 1% of that is 500k which is still extremely high for an author.
What does an author have to do with a CEO of a startup?
5+ months of highly talented programmer is SIGNIFICANTLY more valuable than anything the CEO can do with the extra $100k in their pocket.
5+ months of highly talented programmer is SIGNIFICANTLY more valuable than anything the CEO can do with the extra $100k in their pocket.
Curious why the downvotes for my argument:
Pay yourself what you need, but don't go overboard.
Pay yourself what you need, but don't go overboard.
I haven't read the paper, just the article. It's possible some of these are directly addressed, but I would want to know more before any credibility is given to the conclusions.
Some alternative explanations:
- The 'lowest paid CEOs', per their definition, are typically the ones who have the most skin in the game. When you have many CEOs out there with only $1 compensation, and just stock (and not stock grants as the author mention), they will inevitably be on the bottom. Think Zuckerberg, Google, Apple w/ Jobs, etc. One would expect this highly underpaid group to outperform.
- The highest paid CEOs are often times the ones dealing with the most troubled companies. If you were a shareholder of Kodak in 2000 and saw that digital cameras were coming, would you want to pay for the best CEO possible to ensure you could harvest the most out of the company? Kodak would still underperform the market, but maybe they would have underperformed the market more with inferior management.
- This is a little technical, but with an experienced manager pulling in big dollars, it's more likely that this is a well established company and manager that are well understood by the market. This means that the risk premium demanded by investors would be smaller resulting in a higher stock price. This means that the stock has less to move. And on the other hand, more unproven companies with cheaper managers will have higher risk premia demanded by investors, resulting in lower stock price and therefore have more room to go up over time as some of the unknowns are answered.
Ideally we'd need include other variables such as market size and expected growth (P/E Ratio), CEO share ownership, ex-ante company distress, etc. into the analysis. Based on the described methodology, it doesn't sound like that was done.. but again, didn't read the paper itself.
Some alternative explanations:
- The 'lowest paid CEOs', per their definition, are typically the ones who have the most skin in the game. When you have many CEOs out there with only $1 compensation, and just stock (and not stock grants as the author mention), they will inevitably be on the bottom. Think Zuckerberg, Google, Apple w/ Jobs, etc. One would expect this highly underpaid group to outperform.
- The highest paid CEOs are often times the ones dealing with the most troubled companies. If you were a shareholder of Kodak in 2000 and saw that digital cameras were coming, would you want to pay for the best CEO possible to ensure you could harvest the most out of the company? Kodak would still underperform the market, but maybe they would have underperformed the market more with inferior management.
- This is a little technical, but with an experienced manager pulling in big dollars, it's more likely that this is a well established company and manager that are well understood by the market. This means that the risk premium demanded by investors would be smaller resulting in a higher stock price. This means that the stock has less to move. And on the other hand, more unproven companies with cheaper managers will have higher risk premia demanded by investors, resulting in lower stock price and therefore have more room to go up over time as some of the unknowns are answered.
Ideally we'd need include other variables such as market size and expected growth (P/E Ratio), CEO share ownership, ex-ante company distress, etc. into the analysis. Based on the described methodology, it doesn't sound like that was done.. but again, didn't read the paper itself.
The conflict-of-interest and self-dealing problems at the c-suite and board level are absolutely pervasive at this point.
I don't think much will change until investors finally throw in the towel on the capital gains lottery and start demanding dividends at the point of pitchforks.
I don't think much will change until investors finally throw in the towel on the capital gains lottery and start demanding dividends at the point of pitchforks.
A simpler, and effective, approach is if you don't like what a CEO is doing, don't invest in the company.
I recall years ago a CEO stating that he was adjusting the accounting to reflect numbers "that stock analysts were looking for." He underestimated the investors - they weren't fooled, the stock price tanked and he went out the door.
I recall years ago a CEO stating that he was adjusting the accounting to reflect numbers "that stock analysts were looking for." He underestimated the investors - they weren't fooled, the stock price tanked and he went out the door.
I don't regard that as a particularly viable option: interest rates are low so the natural alternative investment isn't worthwhile and the problem is pervasive so it's true in almost all companies large enough to be listed on a stock exchange.
I'm lucky in that I can invest money in my own business, and afford to take riskier bets on alternative investments, but that isn't relevant for your average investor.
Until capital gain return to their appropriate position relative to dividends (and sane tax law would help here), the shareholder beatings at the hands of the c-suite and boards will continue.
I'm lucky in that I can invest money in my own business, and afford to take riskier bets on alternative investments, but that isn't relevant for your average investor.
Until capital gain return to their appropriate position relative to dividends (and sane tax law would help here), the shareholder beatings at the hands of the c-suite and boards will continue.
> almost all companies
Meaning there are some you can reward with your investment.
> shareholder beatings
I've done reasonably well simply investing in SPY and holding it long term. Badly managed companies get dropped from SPY because their cap evaporates, and well managed companies get on it and stay on it.
SPY is extremely relevant to the average investor, and even more so to the below average investor.
Meaning there are some you can reward with your investment.
> shareholder beatings
I've done reasonably well simply investing in SPY and holding it long term. Badly managed companies get dropped from SPY because their cap evaporates, and well managed companies get on it and stay on it.
SPY is extremely relevant to the average investor, and even more so to the below average investor.
I find is extremely difficult to determine which large companies are self-dealing, since executive and board compensation is not split out in most financial statements. (I can't help but think that this is by design.) So, broadly, I assume all of them are engaged in it unless proven otherwise, which no companies I'm aware of bother to do.
Unless I found some kind of miracle jackpot with the stock reports I've read so far, 100% of them have a section purely devoted to discussing executive/board compensation that is extremely detailed. I know those thick books you get in the mail are daunting, but they do contain a lot of info if you're willing to take the time to read them.
> is not split out in most financial statements.
I hate to belabor the obvious, but that means there are companies that disclose this information, and you can choose (or not) to reward them with your investment.
I hate to belabor the obvious, but that means there are companies that disclose this information, and you can choose (or not) to reward them with your investment.
No, please, belabor.
So, I do do that, by investing in equity (as much as I do) with high dividends, since that is orders of magnitude easier to dig up than to find the few companies that are both interesting as a business and also have sufficiently transparent quarterly statements. Time is valuable, after all.
However, to get back to the original point, the current environment of board and c-suite self-dealing will not change until many, many more people invest and think the way I do. For that to happen, the current bias towards capital gains, which your generation grew up on, will need to be wiped out conclusively.
We shall see if that happens.
So, I do do that, by investing in equity (as much as I do) with high dividends, since that is orders of magnitude easier to dig up than to find the few companies that are both interesting as a business and also have sufficiently transparent quarterly statements. Time is valuable, after all.
However, to get back to the original point, the current environment of board and c-suite self-dealing will not change until many, many more people invest and think the way I do. For that to happen, the current bias towards capital gains, which your generation grew up on, will need to be wiped out conclusively.
We shall see if that happens.
I wouldn't consider buying a company's stock really as investing in that company, because 1) the company doesn't receive any benefit from your purchase except at IPO, and 2) your only incentive is to wait for the price to go up and sell.
Larger investors that buy up significant percentages of a company may be more invested, but again their goal is just for an increase in stock price, but for the long-term stability and growth as a company.
If a company is privately owned, the owners and employees have an incentive for the company to grow over the long term and focus on stability rather than quick wins and short-term financials.
Larger investors that buy up significant percentages of a company may be more invested, but again their goal is just for an increase in stock price, but for the long-term stability and growth as a company.
If a company is privately owned, the owners and employees have an incentive for the company to grow over the long term and focus on stability rather than quick wins and short-term financials.
> the company doesn't receive any benefit from your purchase except at IPO
This is incorrect:
1. corporations often issue more stock and sell it in order to raise working capital
2. employee compensation often comes in the form of stock in one way or another
3. a rising stock price means a company needn't pay out dividends in order to satisfy investors
4. without a rising stock, a company will find it much, much harder to attract investors, employees, borrow money, attract customers, etc. Few want to get on board with a loser company.
This is incorrect:
1. corporations often issue more stock and sell it in order to raise working capital
2. employee compensation often comes in the form of stock in one way or another
3. a rising stock price means a company needn't pay out dividends in order to satisfy investors
4. without a rising stock, a company will find it much, much harder to attract investors, employees, borrow money, attract customers, etc. Few want to get on board with a loser company.
>>I don't think much will change until investors finally throw in the towel on the capital gains lottery and start demanding dividends at the point of pitchforks.
No public company should pay dividends in the current US tax regime. To do so is to leave money on the table.
No public company should pay dividends in the current US tax regime. To do so is to leave money on the table.
I'm not happy that they led with Larry Ellison as an example. As a Founder-CEO, his perspective on the company is fundamentally different from the mercenary CEOs running companies they didn't found or haven't worked at for decades.
There's an interesting psychological phenomenon I've read about where if you offer someone a material reward in return for doing a job, it tends to make them enjoy the job less. In extreme cases, you can take something that a person really loves to do and make it feel like a burdensome chore for them, simply by saying, "I'll give you $X to do Y".
I wonder if this story could have something to do with that.
I wonder if this story could have something to do with that.
You might enjoy "Drive: The Surprising Truth About What Motivates Us", which explores the research on that topic.
http://www.danpink.com/books/drive
http://www.danpink.com/books/drive
I think it has to do with intrinsic vs extrinsic motivation[1]. I'd be a lot happier if I didn't need to get paid for work- as soon as money is involved, my intrinsic drive/interest tends to evaporate and gets replaced with anxiety. I'm definitely a fan of basic income for that reason- the ability to create things\help people without having to be concerned about income so much. If additional income results from that, great! If not, oh well, there were likely still other benefits garnered from the experience.
[1]Self-Determination Theory: http://en.wikipedia.org/wiki/Self-determination_theory
[1]Self-Determination Theory: http://en.wikipedia.org/wiki/Self-determination_theory
I've seen this firsthand with artists and commissions.
It's naive to not pay yourself a reasonable salary once you can afford to.
One of the biggest regrets of failed first-time CEOs is that they didn't pay themselves enough.
One of the biggest regrets of failed first-time CEOs is that they didn't pay themselves enough.
This is studying CEOs of large companies, not startup founders who hire themselves as CEOs and set their own salary.
A reasonable salary is not $28 million a year.
It is if you're in high demand. LeBron James, for instance, earns $19MM per year and generates far more than that in revenues for the Miami Heat and NBA.
The NBA also has a salary cap for players:
http://en.wikipedia.org/wiki/NBA_salary_cap
A salary cap for CEOs would be an interesting experiment.
http://en.wikipedia.org/wiki/NBA_salary_cap
A salary cap for CEOs would be an interesting experiment.
The NBA imposes a salary cap because the owners don't want to pay the market rate for their star players. It does not mean those stars aren't worth the higher salary in the money they generate for the team. It is an artificial limit that does not correspond to value.
That's not entirely true. The salary cap is because if teams paid the fair market value, the teams with a larger budget would be able to run away with it like the Yankees did in baseball (with over twice as many World Series titles as the next best). It keeps the league artificially competitive.
Keeping the business world artificially competitive is an interesting idea, and not as bad as I initially thought.
Keeping the business world artificially competitive is an interesting idea, and not as bad as I initially thought.
Technically, in baseball, the lower market teams get paid out of the luxury tax. Sometimes those payments exceed their team salary. The competitive argument sounds nice, but is more for the owners than competitiveness.
"Keeping the business world artificially competitive is an interesting idea, and not as bad as I initially thought."
I have no understanding of why it is a good idea or how, given CEO's and businesses are not teams competing for a trophy how it is even relatable.
"Keeping the business world artificially competitive is an interesting idea, and not as bad as I initially thought."
I have no understanding of why it is a good idea or how, given CEO's and businesses are not teams competing for a trophy how it is even relatable.
They are teams competing for trophies, though; the trophy is your money/market share.
But beyond that, artificial competition could be a good thing. The large companies have a lot of advantages over the smaller companies, like economies of scale and name recognition, but they also have an incentive to stifle innovation (either directly or indirectly through the Innovator's Dilemma) and erect barriers to entry. Allowing smaller companies to "steal" CEOs helps offset some of those advantages. Even if they aren't well suited to that role, the name recognition alone can be an advantage (just look at SolarCity).
But I keep going back and forth on this. Set the salary cap too high, and the small companies can't steal the CEO away. Too low and it doesn't properly reward them for the difficulties of managing 200k+ person companies. A proper middle ground, if it exists, would be hard to find and need constant adjustments.
But beyond that, artificial competition could be a good thing. The large companies have a lot of advantages over the smaller companies, like economies of scale and name recognition, but they also have an incentive to stifle innovation (either directly or indirectly through the Innovator's Dilemma) and erect barriers to entry. Allowing smaller companies to "steal" CEOs helps offset some of those advantages. Even if they aren't well suited to that role, the name recognition alone can be an advantage (just look at SolarCity).
But I keep going back and forth on this. Set the salary cap too high, and the small companies can't steal the CEO away. Too low and it doesn't properly reward them for the difficulties of managing 200k+ person companies. A proper middle ground, if it exists, would be hard to find and need constant adjustments.
The only ones would could regulate CEO salaries in this manner is government and given the job they do with taxi cab medallions, I do not believe they are competent to do anything but screw it up.
Good competition in the marketplace tends to be good for consumers. It's an interesting notion worth a second thought.
Everything discussed about limiting CEO salaries is actually anti-competitive and will lead to control of everyone's salaries. That has never worked.
Salary is just one aspect of total compensation. The company might give the CEO a $1 salary plus big, non-salary cash or stock bonuses or options.
Ben & Jerry's used to have a CEO salary cap of 5:1 compared to entry-level workers, but the company later had to give in to recruit new CEO candidates: https://en.wikipedia.org/wiki/Ben_%26_Jerry%27s#Wages
Ben & Jerry's used to have a CEO salary cap of 5:1 compared to entry-level workers, but the company later had to give in to recruit new CEO candidates: https://en.wikipedia.org/wiki/Ben_%26_Jerry%27s#Wages
But whereas the NBA can enforce a salary cap for its players, who would enforce the salary cap for CEOs?
Shareholders presumably, if they cared to.
US congre... Oh wait. There is no way something even way milder like making them pay taxes will fly.
Technically Lebron personally makes over 10% of the revenue of the Miami Heat (in 2014, 188M) [3]. There are 68 Heat employees [2] not counting the other players, and definitely not counting the arena workers. During the 2011 lockout, after they signed Lebron, Wade and Bosh, the Heat cut staff salaries by 25%.[1] Of course, not everyone's salaries were cut... like the people with lucrative contracts.
The word 'Reasonable' means "appropriate, fair, moderate, of sound judgment, and sensible". To me, cutting people's salaries so they have to go find second or third jobs, and giving someone who isn't even working over 10% of the revenue of your company, is not reasonable.
By artificially inflating the salaries of players you create multiple problems.[4] Teams with wealthier owners can buy up all the best players and trounce all the other teams. Costs for the teams skyrocket, requiring that salaries then be cut to be able to pay the players more, and requiring more complex ways of making enough money to pay the players. It puts an unfair advantage on the players in terms of determining how the company deals with them. And it creates a disproportionate leverage that de-emphasizes the game, and focuses more on the pain threshold of the market that's paying them. It affects the entire national economy as cities are affected by the touring of the games, building of stadiums, etc.
I don't think anybody's salary should be directly proportionate to the amount of money they make for an employer. While it's one of the favorite tenets of people like Gordon Gekko, it doesn't make for a fair, sensible, or moderate decision, whether you're thinking about the fate of the company, the welfare of the majority of the employees who work for it, or the economy it serves.
[1] http://heatzone.blog.palmbeachpost.com/2011/10/04/as-lockout... [2] http://www.nba.com/heat/contact/directory_list.html [3] http://www.forbes.com/teams/miami-heat/ [4] https://en.wikipedia.org/wiki/Salary_cap
The word 'Reasonable' means "appropriate, fair, moderate, of sound judgment, and sensible". To me, cutting people's salaries so they have to go find second or third jobs, and giving someone who isn't even working over 10% of the revenue of your company, is not reasonable.
By artificially inflating the salaries of players you create multiple problems.[4] Teams with wealthier owners can buy up all the best players and trounce all the other teams. Costs for the teams skyrocket, requiring that salaries then be cut to be able to pay the players more, and requiring more complex ways of making enough money to pay the players. It puts an unfair advantage on the players in terms of determining how the company deals with them. And it creates a disproportionate leverage that de-emphasizes the game, and focuses more on the pain threshold of the market that's paying them. It affects the entire national economy as cities are affected by the touring of the games, building of stadiums, etc.
I don't think anybody's salary should be directly proportionate to the amount of money they make for an employer. While it's one of the favorite tenets of people like Gordon Gekko, it doesn't make for a fair, sensible, or moderate decision, whether you're thinking about the fate of the company, the welfare of the majority of the employees who work for it, or the economy it serves.
[1] http://heatzone.blog.palmbeachpost.com/2011/10/04/as-lockout... [2] http://www.nba.com/heat/contact/directory_list.html [3] http://www.forbes.com/teams/miami-heat/ [4] https://en.wikipedia.org/wiki/Salary_cap
You are forgetting how many butts a player like Lebron puts in seats, not to mention how much merchandise he moves. He adds far more than the 10% of team revenue he takes.
In this age of economic rationalism, pretty much every employee brings in more value than they cost.
It's my understanding that only about 10 people in the world make $28+million a year as CEO compensation. Not saying it's reasonable. Just that people tend to argue as if that much was common.
http://www.equilar.com/ceo-compensation/new-york-times-top-1...
http://www.equilar.com/ceo-compensation/new-york-times-top-1...
So, what $ figure do you consider a reasonable salary?
...but the best negotiators, evidently.
I realize it is popular to hate CEOs nowadays, but the article sure seems to be stretching with its conclusions. It seems much simpler and more likely to simply conclude that companies pay CEOs more than usual and give them large non-cash incentives when the company is doing badly and they are trying to buy their way out of a problem. That explains the increased mergers as well.
The article merely scratches the surface. We can probably agree that corporations have certain structural flaws, but I doubt making a CEOs life more burdensome - who would take the job under a claw-back regime without some kind of financial protection? - will improve the picture.
One line of inspiration come from government - maybe a bicameral board - one for managing quarterlies, the other for longer horizons - might fix some issues.
Another might be to limit cronyism - boards seats given to CEO appointees, or limiting the number of board seats a person can hold.
One line of inspiration come from government - maybe a bicameral board - one for managing quarterlies, the other for longer horizons - might fix some issues.
Another might be to limit cronyism - boards seats given to CEO appointees, or limiting the number of board seats a person can hold.
People need to take the efficient market hypothesis seriously when using stock prices for things like this.
The announcement of a new CEO (or more realistically, the rumors preceding the announcement) already given the market a chance to adjust based on their expectations of the CEO. So what the study really shows is that highly paid CEOs tend to perform less well than the market would expect. This might be because they perform worse. It might also be because they perform better, but not by as large a margin as the market expected.
The announcement of a new CEO (or more realistically, the rumors preceding the announcement) already given the market a chance to adjust based on their expectations of the CEO. So what the study really shows is that highly paid CEOs tend to perform less well than the market would expect. This might be because they perform worse. It might also be because they perform better, but not by as large a margin as the market expected.
One thing that could improve performance: only let CEOs sell their stock gradually over a 5 year period after the exercise their options.
Too much risk for the CEO? He's the one with the most influence over future performance. If he's putting the company on a good long term footing and chooses a good successor, he'll do fine.
If we incent CEOs to think long term, its more likely they will. CEOs that are founders or that have huge investments in their company's stock already tend to think long term.
Too much risk for the CEO? He's the one with the most influence over future performance. If he's putting the company on a good long term footing and chooses a good successor, he'll do fine.
If we incent CEOs to think long term, its more likely they will. CEOs that are founders or that have huge investments in their company's stock already tend to think long term.
Check out CEO compensation for Fortune 500
https://my.infocaptor.com/dash/mt.php?pa=ceo_compensation_20...
Poor performing companies make bad decisions. One of those decisions may be how much to pay a CEO. The causation arrow may be going the wrong direction.
The biggest problem is shown by the article saying that the results are "counter-intuitive". That certainly isn't my experience.
My take from this: it highlights the worst performing boards – i.e. those that compensate highly despite poor performance.
Ehh this isnt really rocket science. If you take someone who is specifically focused on their own benefit over that of the company, and you have that person run your company... they are going to make choices that benefit them more than your company...
I wouldnt say CEOs arent worth it, but the incentives are completely perverse.
I wouldnt say CEOs arent worth it, but the incentives are completely perverse.
This kind of reasoning after-the-fact is easy.
If it was the opposite, it would also not really be rocket science: "Good CEO's have immense values for companies. So of course companies would pay a lot more for those CEOs that do a good job -- it is worth so much to the company."
You can't really make useful predictions with that kind of reasoning.
If it was the opposite, it would also not really be rocket science: "Good CEO's have immense values for companies. So of course companies would pay a lot more for those CEOs that do a good job -- it is worth so much to the company."
You can't really make useful predictions with that kind of reasoning.
The study shows how [over]compensating CEOs with stock options has a much more negative impact on their future stock price than [over]compensating them with cash. In other words, the more aligned CEOs' incentives were with the indicator of the performance of the company, the worse the company did.
How does one go about becoming a CEO? What sort of career progression does it take?
Look up CEOs on Linkedin, look at their history. Maybe shoot them some messages. Networking is necessary anyway.
My uncle, who runs a resort as CEO, started as a bellhop with no college and just climbed in rank (I'm glossing over because I don't know the entire story).
I'm pessimistic and feel like that progression is very, very rare today in larger companies with everyone trying to hold on to middle-class positions as they dry up (so says the news). Hard to advance when there's no room. You'd also likely hit a ceiling today without a degree instead of in the past.
At the same time, I make a grand $15/hr, so I can only glimpse what I've heard from him. Definitely dig and try to reach out.
My uncle, who runs a resort as CEO, started as a bellhop with no college and just climbed in rank (I'm glossing over because I don't know the entire story).
I'm pessimistic and feel like that progression is very, very rare today in larger companies with everyone trying to hold on to middle-class positions as they dry up (so says the news). Hard to advance when there's no room. You'd also likely hit a ceiling today without a degree instead of in the past.
At the same time, I make a grand $15/hr, so I can only glimpse what I've heard from him. Definitely dig and try to reach out.
If you figure it out let me know, because I'm much more interested in making that much money instead of keeping others from making that much money.
> "The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance"
Yeah well this entire study is invalidated by using stock performance as the lazy way to measure CEO performance.
Expensive CEOs are typically expensive, because they're hired to fix a company that everyone knows is going down. The riskier the company, the more the stock is expected to go worthless, the more you get paid in cash for taking on the job.
So it's expected that if you look for expensive CEOs you'll be seeing stock/accounting performance going down in short to mid term, because recoveries, whether successful or not, take time. They take years.
Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you.
Yeah well this entire study is invalidated by using stock performance as the lazy way to measure CEO performance.
Expensive CEOs are typically expensive, because they're hired to fix a company that everyone knows is going down. The riskier the company, the more the stock is expected to go worthless, the more you get paid in cash for taking on the job.
So it's expected that if you look for expensive CEOs you'll be seeing stock/accounting performance going down in short to mid term, because recoveries, whether successful or not, take time. They take years.
Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you.
>Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you.
No. And neither did the study.[1]
>We use three measures of compensation: (i) total compensation (TDC1) which includes salary, bonus, total value of restricted stock granted, total value of stock options granted (using Black Scholes), and long term incentive payouts, (ii) total cash compensation (TCC) which includes salary and bonus, and (iii) the difference between total compensation and total cash compensation (TDC1-TCC) which is meant to capture the options and incentive components of total compensation. This difference, which we call incentive compensation, is our primary variable of interest, including restricted stock grants, option grants, long term incentive payouts, and other annual noncash compensation.
[1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085
No. And neither did the study.[1]
>We use three measures of compensation: (i) total compensation (TDC1) which includes salary, bonus, total value of restricted stock granted, total value of stock options granted (using Black Scholes), and long term incentive payouts, (ii) total cash compensation (TCC) which includes salary and bonus, and (iii) the difference between total compensation and total cash compensation (TDC1-TCC) which is meant to capture the options and incentive components of total compensation. This difference, which we call incentive compensation, is our primary variable of interest, including restricted stock grants, option grants, long term incentive payouts, and other annual noncash compensation.
[1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085
Future expectations about stocks affect their price today. If a company is known to be in trouble, its shares will already be cheap. (A few people, most notably Warren Buffett, can reasonably disagree with this, because they're already very rich from beating the market. Everyone else should just assume that Warren Buffett has already traded the share down to its appropriate price.)
I suspect that the overconfidence explanation given in the article is closer to the right explanation. I was suspicious at first, but then the article gave figures about mergers. It's widely known that mergers usually don't meet expectations, so maybe overconfidence would lead a CEO to think they could escape this statistical fate.
I suspect that the overconfidence explanation given in the article is closer to the right explanation. I was suspicious at first, but then the article gave figures about mergers. It's widely known that mergers usually don't meet expectations, so maybe overconfidence would lead a CEO to think they could escape this statistical fate.
> Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you.
That's not what's implied by the article: "big chunks of the compensation packages for the highest-paid CEOs come in the form of stock and stock options."
Edit: From the paper....
"To better understand the drivers of the pay effect, we decompose pay into its major components. We find that most pay components are negatively related to future abnormal returns earned by these firms, with the strongest components being the value of options granted and long-term incentive payouts. However when we add other control variables that have been shown to explain the cross-section of returns, the components largely lose their significance, with the exception of the value of options granted, which emerges as the main driver of the pay effect."
That's not what's implied by the article: "big chunks of the compensation packages for the highest-paid CEOs come in the form of stock and stock options."
Edit: From the paper....
"To better understand the drivers of the pay effect, we decompose pay into its major components. We find that most pay components are negatively related to future abnormal returns earned by these firms, with the strongest components being the value of options granted and long-term incentive payouts. However when we add other control variables that have been shown to explain the cross-section of returns, the components largely lose their significance, with the exception of the value of options granted, which emerges as the main driver of the pay effect."
The study was explicitly looking for a correlation between stock performance and CEO compensation, the compensation included bonuses and stock/options.
I'm not sure stock performance is necessarily a lazy indicator. Considering that Company Board's hire CEO's pretty much entirely on how well they can move this needle.
I'm not sure stock performance is necessarily a lazy indicator. Considering that Company Board's hire CEO's pretty much entirely on how well they can move this needle.
I can't agree with you more. This would have been a nice study if it didn't reach any conclusions; just laid the data, pointed out all the possible reasons why their analysis could be wrong and paved the way for a better study.
One example, their data only covers from 1994 to 2011.
PS: Direct link to the study http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085
One example, their data only covers from 1994 to 2011.
PS: Direct link to the study http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085
The standard format for a scientific paper includes a discussion section, where you're supposed to draw such conclusions and interpret the results and their significance.
Then it wouldn't be a study; it would be data collection.
I'm ok with that. But I guess that "data collection" documents don't count towards academia points.
Sort of like:
Here's the data. Analysis is an exercise left to the reader?
I guess what I'm trying to point out here is that while collecting data does take up most of the bulk of the work, data is meaningless without analysis and direction to inform further gathering. That's why the field of study called statistics exists. It's not just about academia points.
On the same vein, the reader should be critical of the analysis; it should not be taken as accepted truth. And the writer should try to predict and address criticisms.
Here's the data. Analysis is an exercise left to the reader?
I guess what I'm trying to point out here is that while collecting data does take up most of the bulk of the work, data is meaningless without analysis and direction to inform further gathering. That's why the field of study called statistics exists. It's not just about academia points.
On the same vein, the reader should be critical of the analysis; it should not be taken as accepted truth. And the writer should try to predict and address criticisms.
I would agree with you when the analysis is correct. However, no analysis is better than a wrong analysis, especially in cases where politicians may use the studies to pass laws that may hurt citizens. Remeber the whole Reinhart And Rogoff ordeal.
"The Highest-Paid CEOs Are The Worst Performers, New Study <Which Is in Line with People's Assumptions> Says"
This is a Common Sense Fallacy[0].
Playing devil's advocate, the result could have been that CEO pay was very well correlated with performance. The company doing well can justify a higher compensation.
Of course, this is probably the argument that gets used.
[0] http://corkskeptics.org/2011/05/03/the-common-sense-fallacy/
Playing devil's advocate, the result could have been that CEO pay was very well correlated with performance. The company doing well can justify a higher compensation.
Of course, this is probably the argument that gets used.
[0] http://corkskeptics.org/2011/05/03/the-common-sense-fallacy/
This would also explain why the negative correlation is strongest at the extreme high ends of the pay scale - these are the companies that are in the worst shape - and why these CEOs relied heavily on acquisitions, because they had no talent or useful products in the organization itself. It also fits with Warren Buffett's observation that "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."
One way to confirm or deny this hypothesis would be to look at companies that previously were high-performing, and then see what the correlation between CEO pay and the change in market performance is within that group.