Why do executives make so much money?
 

It seems to be a common theme in this forum(admittedly largely Liberal) that people who make a lot of money, e.g. CEOs and others in executive positions, don't deserve it. They are inherently evil and live off the labors of "real" people. They should make less money and pay more taxes, and they certainly don't deserve any respect.

I happen to agree that those who cause a company to do poorly or fail should NOT reap huge rewards for their (failed) efforts. But for those who do well, and increase their shareholders' value (shares that may be in your 401(k)), and who create jobs and contribute to this country's economy, I feel that they do deserve a reward for their efforts.

Executive compensation is most often determined by a compensation board working for the company's Board of Directors. These folks decide, for example, that a talented CEO will likely increase the annual profit of a company by much more than what they pay said executive. It's a fairly simple business decision. They are not in the business of giving away a company's money without expecting something in return. Again, their judgement is sometimes faulty, and they make a deal with what turns out to be a loser, but in the majority of cases, the person they choose and pay well usually comes through with business decisions and plans that are profitable.

If this wasn't the case, they wouldn't do it. It's all about profit and if this paradigm wasn't profitable, it would become extinct.

So, the discussion point: Is it inherently evil to pay large amounts of money to someone who will, through their efforts (mainly decisions and plans) return the favor to the company? Do you see a better way to run companies without paying large sums to attract the best business talent as leadership? If your idea is better, why aren't companies adopting your ideas right and left?

Keep in mind, as you respond, that CEOs aren't onipotent. They work for the Board, and ultimately for the shareholders. They can be, and often are fired if they don't make the company more profitable.

A little thought experiment: If someone came to you and said "You are more knowledgeable about ______ than anyone I know and you have a history of succeeding at whatever you do. Would you run our company for $10 million/year?" Would you take it, or would you turn it down rather than join the ranks of _______ (whatever your personal politics and beliefs are of such a person?

I have no problems with people making tons of money.. as long as it's done in the confines of the laws. I only take issue when a company knowingly puts themselves in a better position by putting people in bad positions i.e. the mortgage issue we all know about.

I have real problem with enormous executive compensation in public companies that is not tied to either performance or risk - like the guy from Lehman brothers who made off like a bandit (what $400 million?) when he got sacked.

People's portfolios have been ruined and guys like this were continuing to rake it in.

If people do a great job (i.e., increase the bottom line) they should be rewarded. But executives are being lavishly rewarded with our investment money for doing crap jobs, and that has to change.

The simple answer is that executives vote to award executives pay.

It's abuse of power, and if I was in their shoes, I probably wouldn't change a bloody thing.

That is a simple answer. Wrong, but nice and simple. The Board decides on pay, with a company's profits in mind.

And who acts as members of the board, mcgeedo?

Why, CEOs from other companies, of course.

So my answer "executives vote on executives pay" is true?

I never said they vote for their own pay, but all the guys at the top vote for each other's pay - it's a giant circle jerk.

How can I argue with logic like that...

I have a problem with criminals and a bigger problem with successful criminals. I have a huge problem with people being compensated unfairly.

You are bang on - executive compensation boards are made up of executives.

I think simply tying compensation to performance (and performance on a variety of levels including that of stock, overall value of a corporation and profitability) addresses a myriad of issues.

"I think simply tying compensation to performance (and performance on a variety of levels including that of stock, overall value of a corporation and profitability) addresses a myriad of issues."

Which just happens to be the norm. You don't hear about it because it isn't news.

I'm sorry - you are claiming that exec pay is tied to stock performance?

So all the top bank execs will take 90% pay cuts next week then?

I think that CEOs making millions a year is stupid but I think that salaries up to a million aren't unfair at all. Some of these CEOs and corporate guys making hundreds of thousands a year deserve it because they can do shit that you can't. You think you are a good business person, you think you are a good worker, you think you can turn a company around but you can't. They can, and that's why they are rewarded. Some people can make an entire division work harder and have a positive attitude just by being there (their personality and work ethic are that strong and infectious).

I know that this isn't the case in every company but it is in many. I see nothing wrong with paying someone who can single handedly bring amazing profits and work ethics to a company that was otherwise not doing that well.

I'm sure all of you think I'm bullshitting but it's the truth. There is such a thing as miracle workers out there and many of them are CEOs and higher ups that deserve it. Guys who don't crumple under pressure. Women who make decisions based on their judgment and knowledge. PEOPLE who make DECISIONS in general are already ahead of the game. People who can be put in a situation and all of a sudden work is being done, done well, and being done on time. These are invaluable assets to a company and a large majority of the workforce simply can't do this shit.

Why?


Cause they sign the checks...

there is no inherence.
evil is not an interesting term to use to frame this question of executive salaries. it's like asking "do you still beat your wife?"

do you think that companies generate profit in a vacuum?
do you think markets are separate from broader social contexts?
what relation do you think obtain between markets and these contexts, if any?

It fascinates me to hear people that haven't a clue what an executive does comment on how little they do. Sign checks indeed.

Imagine an executive that meets with his marketing people, reviews a handfull of ideas, and chooses two or three to follow up on. He then meets with the engineers and talks about what might be manufacturable. He then meets with the finance people and argues for an investment in research and development. With his vision and insight into the marketplace, he ends up with, say, the iPod. Signs checks indeed. Who do you think makes the decisions based on his vision that ends up with things like the Mustang? The clone bolting on bumpers?

And yes, many banking executives will lose options and incentive bonuses over the current crisis.

Not really.

First off, many of the big investment banks didn't work like that. Execs might be rewarded for very specific goals that did not truly contribute to the overall success of the company. Bringing in more clients is nice, but to be rewarded for that specific goal is stupid (as Lehman Bros found out) if at the same time bad investments and trades are being made. Being rewarded for short term profits is bad if the result is long term instability.

Too many executive compensation arrangements reward for very focused goals - that's fine if you are a salesperson or developer or other person with a finite role and objectives. It's moronic when you are a CEO in charge of billions of dollars in capital and thousands of employees.

The other problems relate to the way hiring contracts work. Stuff like "If you fire me for any reason, you have to pay me 100 million dollars" is ridiculous - it either makes poor executives unfireable or it costs a company and its shareholders huge sums of money.

I think it is all about perception.

If you hire someone who has a history of either success running another company or competence rising through the corporate ladder labrynth, it can create a buzz around your business and more specifically your stock price. The same thing can happen in hiring someone who has created a perception around themselves through self-promotion.

I like to think of it as hiring a head coach and/or general manager in professional sports. For a team, especially one that is struggling, hiring the right person (or who is perceved to be the right person) can on its own generate increased good press, as well as increased income from an excited fanbase. The big name might cost a lot of money and have very high demands, but it can be worth it if your team can turn the perception into reality, but the short-term gains can become long-term losses if the hire is a failure.

So far, I am with Highthief on this the whole way...

The main issue today and in the future (unless it changes) is:

As long as there is no risk for these executives, they will continue to gamble and take unbalanced risks with other people's money. Their own financial security needs to be better tied to the fortunes of the businesses they run.

100% agree

I am still floored by the salaries and bonuses these executives can pull in even when they run the companies into the ground. Not sure if i am more impressed with the size of the payout or the fact that they can some how get away with it due to the contracts they have regardless. If we all could be so luck to have our incompetency rewarded.

The CEO of the company I work for is young and spends the money he earns. Big house, pimp cottage and rare cars are his daily drivers and he totally deserves it and more. The man works hard, good leader and his strategic plan is/was money!

Its very easy to question the compensation when there are several current instances of blatant abuse or decadent payment for what seems to be exceedingly poor performance. However, the vast majority of highly paid executives are worth every dime paid to them. They have to be clearly different than the rest of us to achieve what they did. Most are workaholics and not just to get 'there' but to stay 'there'. Most have an unbelievable work ethic. Most of them you'll never hear their names mentioned. I've worked with some incredible people at that level. Not once did I feel they were overpaid. The good ones, the one's we'll never hear about are truly gifted.

I tend to fall into the category of they are worth their salaries. Whether some are worth $60 million a year is questionable, but leadership is a rare commodity and thus highly rewardable. Most people just want to get by.

To be clear, I have not particular issue with the compensation per se. If the board wants to spend its profits on compensating its CEO and other executives with huge sums... that's their choice.

My issue lies simply with the fact that their compensation should be more firmly linked to the fortunes of their companies. While in many instances this is true... for the most part it is not the case.

Here is an interesting entry on Mark Cuban's blog... LINK

Speaking of executive compensation:

Dick Fuld Is Punched: Lehman Brothers CEO Got Punched In The Face

Booya.

Well all I can say is that I would like to think that people at that level of accomplishment would take some pride in running a company properly, and that after a certain level of financial success it wouldn't always be JUST about money for them personally.

It's not about taking pride in running it properly... it's about greed and a sense of invincibility.

I remember a study done a couple of years ago (Is Your Boss a Psychopath? | Fast Company) which suggested that many CEOs had psychopathic tendencies - that their own edification grossly outweighed any concern for the fortunes of their company, which is exactly the sort of person you'd think you wouldn't want running a large organization.

I've known 4 big CEOs well, one of them being my brother. 2 of them were pretty normal, if driven, people (inlcuding my brother!) with great concern for their company, employees and shareholders. The other two are/were very selfish and self-centred bastards utimately concerned with their own compensation above all else.

You're asking the wrong question. The real question is why aren't ordinary Americans making enough money?

http://www.economicmobility.org/asse...m%20Report.pdf

Personally, I'm less concerned with the paychecks of corporate executives and more concerned with the paychecks for me and my fellow workers. Many columnists and bloggers refer to this report and the startling news that between 1979 and 2005, executive pay has risen nearly 228%. But it's only recently that they've focused on the other side of this equation: in the same time that executive pay has risen, the paychecks of the working class has not. Will a reduction in their salary guarantee an increase of mine? Sadly, no.

So why has corporate salaries jumped while the average American's salary remained flat? It can be blamed on cronysm at the corporate board level, but I think it's a long running problem of devaluing the American worker. When a union goes on strike over pay and job security, we grumble about the greedy union workers. We see companies lay off older employees and rehire newer ones at lower salaries and smaller benefits and write it up as a reduction in labor expenses, which bumps up share prices. If our paychecks mached our productivity we wouldn't be having this discussion because we'd get exactly what we were putting in. But we find ourselves working harder for less money, and don't you dare complain because you should be glad that you have a job at all, we're told.

So complain all you want about why they're making so much money, it ain't gonna do you a damn bit of good. When you're ready to discuss why we're all overworked and underpaid, come see about me.

I don't know how to judge CEO compensation whether it is 1 million or 500 million per year and if it is justified or not. But one thing seems to be very clear, these people are very smart and many negotiate contracts that will set them up to live a wealthy lifestyle for the rest of their lives regardless if their decisions result in failure or prosperity. If the boards are really made up mostly of other CEOs then I guess it is like a mutual admiration society. Maybe these people are really concerned about their company's success or failure but the executive compensation packages we read about lately for the failed companies seems unfair. I guess we want them to suffer like the rest of us stockholders and taxpayers instead of enormously profiting either way.

There are good CEOs and there are bad CEOs. It only the bad ones that people talk about. And the good ones tend to get lumped in with the bad.

I have no problem that Bill Gates, Steve Jobs & Meg Whitman made lots of money. Well, Bill Gates kind of cheated at the start, but I still give him credit for making computers more productive. They deserve their money, and their employees are well compensated. They haven't engaged in any dirty financial tricks to make their stock price go up. And I can respect that their contribution to the economy should be rewarded financially. They produce a product that millions or billions of people have used. And at the same time, the people made a choice to use their product and weren't forced to.

But there are other people who come along after the company has be running for 50 or so years, don't do very much, but walk away with a large chuck of money because it was in their contract.

The real world is about supply and demand.

The labor of the average low-level and/or blue collar worker is easily and cheaply outsourced on the world market. Compared to the world market, American labor costs in manufacturing and similiar industries are extremely high (i.e. most American workers are overpaid according to the world market). The real problem is the sense of entitlement most of us as Americans feel. It is amazing how high of standard of compensation and living we expect, even if our skill set does not set us apart from anyone else.

Overpaid to some is fairly paid to others.

That said, I do agree in general with what you are saying about the sense of entitlement. I am just not so sure it is a misplaced sense of entitlement.

I think it is hard to disagree that if *all* workers were paid a better wage the world would be a better place... higher standards of living across the board.

That model has been tried with a couple of different variations. For the most part Communism and Socialism has failed.

And if you were to just continue to raise the wages of those on the low end of the scale in the US, it would cause two things. First, inflation would kick in and eat up a huge portion of the increase. Second, companies in Asia, Eastern Europe, and other less developed lands would do the same work for less, causing the US jobs to be lost completely.

I work in industry and have watched this second effect happening over and over again in the last 15 years with my customers.

I think you missed my point.

I was not suggesting that the US do this unilaterally. I was also not suggesting that it be imposed by law.

I was simply musing that the "working wage" of many is well below a "living wage" in many parts of the world. It would be better for all if more money was spent compensating labour in an better manner (and by this I am largely talking about workers outside the western world). I can agree that many in the US could be making less but I wouldn't exclude executives from that mix.

There is an inordinate amount of wealth being held by an increasingly smaller group of people.

I also agree that inflation can be a factor as well. It is a complex system made increasingly complicated by the spectre of globalization.

Fun fact about that executive and being punched: 90% of America believes the punch was justified/would have done the same thing.

I voted that it was wrong, and kind of expected slightly different numbers, too. Not that I think the boss was in the right, but I think suing would've been the better option if he mismanaged so terrifically.

Also, about the PEW report earlier: I was surprised by many things, but curious about the 'productivity'. How do they measure productivity, and how has it continually risen in that exponential trend @_@.

I wouldn't take the results of an Internet poll on whether or not he should have been punched in the face all too seriously. I voted that he should be punched but only because I thought it was kind of funny. The distance created by the Internet allows me to take this stance... it's like watching a bad sitcom on TV.

Face to face with the situation, I wouldn't advocate for the punch in the face. As visceral and therapeutic as a punch in the face maybe it won't hurt him as much as a lawsuit. Hit him where it really hurts... his wallet and/or his freedom (i.e. jail).

Why can't we sue him AND punch him? Maybe punches could be part of the settlement.

Have him move here... the punishment can include stroke of the cane.