I have to admit I was a little skeptical of this argument, but it is growing on me.
Basically, he is saying that executives are paid ungodly amounts because people are willing to pay them that. If it isn't my money I have no right to begrudge them theirs. And furthermore I really have no idea what CEOs do or how they do it, so I have no basis to judge whether it is worth it.
Money quote:
Many observers who say that they cannot understand how anyone can be worth $100 million a year do not realize that it is not necessary that they understand it, since it is not their money.
All of us have thousands of things happening around us that we do not understand. We use computers all the time but most of us could not build a computer if our life depended on it -- and those few individuals who could probably couldn't grow orchids or train horses.
In short, we all have grossly inadequate knowledge in other people's specialties.
The idea that everything must "justify itself before the bar of reason" goes back at least as far as the 18th century. But that just makes it a candidate for the longest-running fallacy in the world.Given the high degree of specialization in a modern economy, demanding that everything "justify itself before the bar of reason" means demanding that people who know what they are doing must be subject to the veto of people who don't have a clue about the decisions that they are second-guessing.
It means demanding that ignorance override knowledge.
The ignorant are not just some separate group of people. As Will Rogers said, everybody is ignorant, but just about different things.
Should computer experts tell brain surgeons how to do their job? Or horse trainers tell either of them what to do?
One of the reasons why central planning sounds so good, but has failed so badly that even socialist and communist governments finally abandoned the idea by the end of the 20th century, is that nobody knows enough to second guess everybody else.
Many of you may have a problem with this argument, but think about it this way: Do you think that most politicians have any idea how science or medicine works? Probably not. Yet, they try and regulate it ceaselessly and look how mad we get. How can we on the one hand attack the politicians for political interference and on the other demand a say in something of which we are equally ignorant?
I don't doubt that a lot of CEOs are not going to deliver profits for how much they are paid, but saying it isn't worth it to pay them that much is predicated on two things. 1) What does worth it mean? 2) Who is it worth it to? I have no idea what worth it means for a company I know nothing about. I am not the investor; therefore, it isn't my call.
A tough statement, but I think he is right.
- Log in to post comments
WRONG! It is my money. Try getting a bigger raise. whoops sorry, the company doesnt have anymore money for a raise. Thats because the ceo got $100 million. there is only so much money to go around in a company. If one person gets a huge amount, thats less for everyone else. including making a better product or a higher dividend.
Some serious ground-shifting going on ...
That's not the point. The question is whether one can reasonably judge whether someone else is worth what they're paid.
Simple example - let's say I'm a shareholder in a company where the CEO gets a gazillion in salary and another gazillion in bonuses or stock options. If the value of the stock has dropped during his tenure, he's going to have to do some fancy footwork to convince me that he's been worth it.
Broader example - one can read the comparisons between the multiple of a CEO salary to average worker salary for the US and for other parts of the world. As a shareholder of a number of US companies, that may provide me with evidence that suggests to me that many US CEO's are not worth it.
While I feel that CEO salaries are a bit much, as long as the Board and the major stockholders are OK with it (and they have the right to vote their voice about things like this), then I'm OK with it. What I can not stand is the Golden Parachute that a CEO gets when the company does not do well. In my perfect world, a CEO would get nothing unless the company turned a profit and the stock value went up during their tenure, and any bonus they did get would be tied intimately to company performance (i.e. the company only grew 5%, you only get 5% of your promised $400 mil. bonus).
I agree that it is not my money if I have not invested in the particular enterprise from which the CEO gets his (usually) money. The problem of segmentation of social roles is much more problematic and complex. We are becoming more stratified in our society because of serious differentials in SES. This affects health and longevity as well life courses. If we gave 10% of "their" money to community efforts to do stratification reduction could we make this less of a social issue? Rampant individualism strikes again and is destroying the social and political fabric of society.
Two points where I think you were being, perhaps, a touch naive?
If it isn't my money I have no right to begrudge them theirs.
Except is IS your money. Its the price tag you pay at the store. Its the stock value inherent in your 401K or your IRA (your money IS in there, whether you otherwise "invest" or not). Its your tax dollars paying for welfare and unemployment insurance for all the laid-off workers suddenly flooding a region that can't afford them while the CEO, having "saved money", rakes in more dollars.
That's a moral judgement call that I think is perfectly legit to make - if a company is suffering, it should morally be suffering at ALL levels. Honest CEOs would take a cut in pay or a cut in their bonus, not get their boards to give them a raise, whenever they "cut costs" in ways that directly affect people.
There's also the golden parachute factor - the fact that the CEO has no risk involved. THIS is what really pisses people off, that the CEO can totally screw it up and do nothing right at all and still walk away with millions.
The second, however, kinda counters some parts of my first and is why this is so much more complicated than a mere moral issue.
I really have no idea what CEOs do
This is actually the easy one to answer: they make decisions.
Decisions which direct how the rest of the company acts (provided anybody actually listens to them).
Do you expand your market to new customers (XM Radio) or do you come up with new products to sell to your existing customer base (Apple)?
Do you brave new ground by letting your developers scratch their itches and combine and integrate fields that didn't originally seem like they might go together (Google), or do you wait for other companies to make a market a success and then swoop in with money to buy it out or clone the lead product (Microsoft)?
Do you save money through painful layoffs (common) or do you work to find a new market that can take advantage of the personnel and their talents in a different way (rare)?
Do you keep a trustworthy hierarchy underneath you that really believes in what you're doing (Google) or do you constantly restructure and shift people around so that anybody who could challenge your authority either quits or is so powerless they can't do anything to you (Apple under Scully, HP under Fiorina)?
Basic, simple decisions, decisions nobody else wants to make.
So there's the real answer - what is it worth to a Board of Directors to not have to make those decisions but to let someone else make them and take the fall if they don't work?
Some company's boards feel no qualms at all about paying millions just to not have any personal guilt about their own management failings.
"While I feel that CEO salaries are a bit much, as long as the Board and the major stockholders are OK with it ..."
How many of those who set salaries for major company execs work at companies at which the board of directors sets their salaries?
The main reason executive salaries are so high is that because their decisions affect how very large amounts of resources are used, even slightly better decision making can make a larger difference in the company's bottom line, making it worth paying huge salaries in order to get the best executives, even when they aren't that much better than their peers. It's also worth noting that the impact of the decisions scales with the size of costs and revenues, not the size of the profits.
Of course, it's often difficult to tell ex ante who would make the better decisions, and even after the fact it's not always clear how much of profit or loss a given executive was responsible for. This actually contributes to the motivation for paying a lot for executives, since in absence of any really strong way of telling that that a would-be executive who would work for less is indeed as skilled as established executives, the board and shareholders will allow overspending to reduce the risk of appointing an unproven executive who turns out to be incompetent.
In theory at least the CEO is working for the owners. For a public company those owners are the owners of the stock. Of course you own stock through your 401K. If you have an old fashioned defined-benefit retirement plan, you still own stock, although your benefit is not directly tied to the performance of its investments, if they do poorly enough it won't be able to deliver the promised benefits.
So in any case it is the stock owners, largely through the directors who hire the CEO's. The theory seems to be that paying a high salary attracts a CEO who will make a large enough positive change to the bottom line to be worth his salary. We all know how a bad CEO can "destroy" a lot of company value, the real issue is whether on average higher/lower pay will increase the value of the average company.
MattXIV and bigTom both lead in to my real opinion, which I might have mentioned above. Its not that the salaries are too big so much as the parachutes and the exceptions, the fact that there is no financial risk (though plenty of reward) for the decisions being made. Decency and fairness don't suggest that someone should get $25 million just for walking through a door.
Granted, Capitalism says that what the market will bear is the only thing that matters, and if the only way to get someone is to say they aren't at risk when they fail, then that's what it has to be. Nobody ever said Capitalism was decent or fair; quite the opposite, actually.
The real question is should the government dictate corporate policy? Is it wrong for congress to define a salary cap relative to performance or to the average salary at the company. Here, libertarianism is clearly on the side of big business in saying the government has no right to get involved in private contractual arrangements, provided their taxes for those high salaries are getting paid properly.
But, of course, that same argument that they shouldn't get involved in the top of the salary chain also applies to the bottom, that there shouldn't be a minimum wage either.
Is there a middle ground? I suppose that's what we're trying to find out. I don't know.
The big problem is that most board members are also CEOs. I'll scratch your back, you scratch mine. I wonder if the problem would be mitigated if CEOs couldn't serve on boards.