Are you mad about corporate executives that become private-jet wealthy while running their companies into the ground? The Republicans say we should just let the free market work, and the Democrats want to set salaries for private companies.
Neither one of those ideas seems right. But if we think it through, there's another way to approach it that will keep us from indigestion over the morning financial pages.
There are two kinds of CEOs: the sort who risk their own money and, by dint of their imagination and hard work build an empire and become fabulously wealthy. They earn whatever they earn, and the government should have nothing to say about it. Think Bill Gates or the late John H. McConnell.
That’s the free market, and it’s not somehow immoral that somebody got rich.
Then, there are those who run companies with other people’s money. And their outsized salaries are not a function of a free market. Here’s a conservative idea: let’s subject those pay packages to the free market.
First, a bit of background.
CEO salaries are generally set by “compensation committees” – people very much like the CEOs they oversee. They use consultants to figure out what other CEOs are making. Then, they sweeten the deal a little, to keep their guy on board. The compensation committee reports to the board of directors, which generally rubber-stamps the recommendation.
Those compensation committees protect CEO salaries from market forces, because they assume what all the other compensation committees decided to pay is the value of a CEO.
But the value of a CEO to a company is not what everybody else pays, but what that particular CEO produces for the company – at its simplest, did the company make any money?
In the compensation committee system, it doesn’t matter. You can run your company into the ground and become fabulously wealthy.
So, here’s the idea: Unless you have a serious investment at risk in your company, top executive compensation must be approved by a simple majority vote of the shareholders at the annual meeting.
If the CEO is making the shareholders wealthy, they will gladly pay her whatever is asked. But, because shareholder meetings are expensive and infrequent, the board will not be willing to take an outrageous pay package to the shareholders for a CEO who is bleeding cash.
That’s not the heavy hand of the government “regulating” private enterprise. It’s setting a fair rule to prevent those with the most power from abusing it for private gain.
Subscribe to:
Post Comments (Atom)
5 comments:
Dave,
Substitute public school employee for CEO and you are on to something.
By the way, you are conflating CEO with entrepreneur. A CEO is the manager, not the one with money at risk.
Also, the issue is government regulations that all but stop corporate takeovers. Corporate waste cannot be undone via takeovers.
Who advocated for such laws? CEOs.
Jim,
Thanks for your post. And I appreciate the fact that you posted your real name.
Much of the public thinks CEOs and entrepreneurs are the same thing -- and sometimes an entrepreneur will take the title CEO. I wanted to point out the distinction, because I think it should affect the rules.
Dave
Jim is incorrect about a CEO having money at risk and What is missed in your assessment of CEO pay is percentage paid in stock, options and grants, which is directly tied to the performance of the stock, therefore have skin in the game, or risk. Stock is in most cases the vast majority of compensation, and vesting schedules require performance to be maintained of many years. Many CEO take a "nominal" salary.
There are shortfalls in this because the stock price being a gauge of CEOs performance is not a true measure of their effectiveness. An example of this is HomeDepot and Bob Nardelli. When he took over it was a wreck. Over his tenure he really did a fine job fixing the business. Nearly every fundamental metric used to evaluate a company improved, P/E, Price to sales, price to book, ROI, EBITA, etc. Even if he was a demanding boss he got the job done. Herein lies the problem, the stock price was flat. Investors got impatient and ran him out. Big difference in performance of a company and the performance of a company's stock.
Are CEO's overpaid, well their value is directly related to what someone is willing to pay, and they accept.
User, I agree with most of your argument.
I would include stock as part of the pay package, and a sufficiently large stake would support the "entrepreneur" exemption.
The idea of government deciding who can earn how much makes my skin crawl. But a publicly-traded corporation belongs to the shareholders. What's wrong with letting them decide? They're not going to cut their own throats by hiring cut-rate talent.
This proposal simply will introduce information and breadth into the CEO market.
Dave
6:24 --
Your are conflating two separate roles: the CEO as manager; and the CEO as part owner.
I have stock in my company, that makes me an owner. But the largest part of my total compensation is in salary, not due to increases in the stock price.
You noted the difference when discussing CEO bonuses based on stock prices. A CEO may attempt to manipulate stock prices for personal gain, but, by doing so, he is not adding to the wealth of the other shareholders.
It happens that CEOs push for stock buy-back in order to raise the price of the stock. So, the CEO drains cash reserves for personal gain. This is not the action of a true owner of the company.
Post a Comment