Tuesday, September 30, 2008

Excessive CEO Pay

As discussions over the bailout continue in the midst of yesteday's defeat in the U.S. House, the issue of excessive CEO pay and benefits has come to the forefront. The idea of CEOs bailing out on their responsibilities before their companies crash, killing stockholders and employees alike, looks bad enough. Bad though turns to outrage when you consider that many of those CEOs are descending with golden parachutes to a fabulously wealthy retirement.

Liberals are outraged and demand that there be special taxes on CEO pay or some other limit put on the compensation. Many conservatives claim that the free market determines the CEOs salaries and that the high salaries and benefits are needed to attract quality individuals to be CEOs to the companies.

While the socialistic tendencies of the liberals can be discarded as so much rubbish, a philosophy rejected soundly by history, conservatives likewise are off base. The premise behind the position - that the free market is determining CEO salaries - is simply wrong.

Who decides CEO salaries? The Board of Directors of a corporation generally decides a CEO's salary and benefits. Who sits on those Boards? Well the answer with regard to most large corporations is CEOs and other high executive officials of other corporations.

Executive pay is not deterined by the free market but rather by a "you scratch my back, I'll scratch your back" philsophy. CEOs of failing companies still make huge salaries, not because of performance or the need to pay to attract the talent, but because their friends are sitting on the Board, friends I might add who expect the same consideration when it comes to their executive compensation.

Rules are not always evil things. Properly enacted and enforced, rules can enhance, instead of hindering, the free market. Rules prohibiting CEO types from sitting on Boards where they can rubberstamp each others outlandish pay and benefits would seem to be a regulatory reform worth considering.


Downtown Indy said...

About 'attract quality individuals to be CEOs' -

That surely is a bell curve relationship. Up to the peak the salary and competence rise. Beyone that as the salary increases, I believe the 'quality' decreases. It's in this area where the really cutthroat and self-serving show up and thrive.

Anonymous said...

I agree largely with what you said, except for the comment about socialism. As a soon-to-be sociology graduate and avid history buff, I have to point out that history never knew socialism: The soviet union mostly resembled a capitalist nation, and marxs' ideas never really sat well with guerilla government leaders. The closest economic animal to socialism includes current European nations that have officially been recognized by statisticians, sociologists, and economists as more affluent and prosperous than the U.S. Not that everything is perfect over in Europe, but I think we should be willing to admit where they stumped us, and where "liberals" like Marx may have been right. Most of the people who make socialistic claims do so because they are very educated and studious individuals, and they see things that others don't or won't see in our society. Anyway, I will say that the rest of what you said was spot on.

Anonymous said...

According to me CEO pays are not determined by performance alone, unless the performance is absolutely worthless. It seems a CEO is paid just for staying around with the company. The CEO pay should be based more on EPS, market-share and ROIC which these chiefs have considerable influence on. For more details on CEo pay scale refer ceo pay scale