CEO compensation

August 18, 2008 at 7:14 pm | Posted in Business | 3 Comments
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You read an article like this, and it likely will cause some sort of strong reaction. I mean, if you are not a CEO, then it is really hard to not feel a big of anger and righteous indignation creeping in. But here’s the thing, what if you ARE a CEO, or about to be a CEO? My guess is that you will feel things are just fine. And, once you are in that circle, most everyone else thinks that way as well because, by and large, they are all generally in the same tax bracket. And CEO’s are hired by boards, who are likely comprised of former or current CEOs, or at least those that run in the same circles

Mark Cuban, the iconoclastic owner of the Dallas Mavericks, has some interesting thoughts on this one. Most business folks I know think Cuban is an idiot, and liken him to a spoiled kid who fell bass ackwards into a lot of money. Even if that’s true, we should not commit the logical fallacy of Argumentum ad Hominem, which is basically a rejection of an argument by assaulting someone’s character. As I read his post, I think he has an interesting take when he basically says the gap in compensation exists between CEO and “regular worker” because they are of a different type altogether.

The problem is, the self-feeding machine is now running and many companies have CEO’s with almost no tie to corporate disaster (as seen in the mortgage industry collapse where many CEO’s walked away with 10’s of millions while shareholders and employee 401K’s became worthless). But how do you stop it? Which Board of a high profile company is going to say, “Nah, we’ll go hire on the cheap” and not pay the going rate with the same conditions? Are we going to try and legislate it? I sure hope not, because I just don’t think that has ever worked well in a free-market economy.

More thoughts on this one later, with maybe some perspective from the other side.

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3 Comments »

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  1. Interestingly enough, there has been a push in some circles for basing CEO/executives’ pay on EVA, economic value added. Theoretically it is the true value added to the corporation by subtracting economic opportunity costs. Therefore, the calculation will determine if the rate of return required by the shareholders will have been met. Just some food for thought. Nice post though!

  2. I am certainly not advocating anything, but will try and add a slightly different perspective.

    Generally, a company changes their CEO when things aren’t going well. Maybe things are going really badly or are about to go pear shaped. In an effort to prevent or minimize this, the board looks to put in place a suitable CEO who has the reputation and past ability which provides the best future hope for the company. Things may be so bad that the board is not looking for a turn around, but for someone to minimize the negative impact the future holds for them.

    A professional CEO needs a lot of incentive to take on a ticking time bomb. Regardless of the financial benefits of the particular role, being the captain of a sunk ship will limit their future opportunities and hurt their future earnings potential. Their past history and reputation is their primary assets, so the incentive needs to be adequate to the mitigate the future risk the CEO is taking on. And of course the incentive needs to be in balance with the risk that the company is trying to mitigate in taking on the CEO.

    Failure is judged purely as failure so it is hard to know if a good CEO actually minimized the impact of that failure or not. Everyone will be upset if they lose value, but try explaining in a positive way that they didn’t lose nearly as much value that they could of.

    The examples in the article you linked to are extreme, but the CEO is carrying the public responsibility for the failure.

  3. While this is obviously a complex issue an easy way of thinking of things is to not treat the CEO as an employee but as a one person independent strategy consulting firm. On that scale you dont pay for a CEO’s time, you pay for their reputation.


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