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By October 3, 2012 16 Comments

Are America’s CEO’s still over paid?

There has long been a debate surrounding the pay packets of CEOs across our leading companies, and arguably movements like Occupy have helped push the issue back to the front of our conscious. While some on the more extreme end of the spectrum approach from an anti-capitalist perspective, there is a respectable mainstream which recognizes that top CEOs can do a difficult job extremely well yet is repulsed by the seemingly blatant overpayments and “rewards for failure” culture that’s graced our top companies.

Take, for example, McKesson (NYSE: MCK) CEO John Hammergren – Mr. Hammergren generated a 20% annualized return for shareholders and received a whopping $131.2m in direct and indirect remuneration as a consequence. The price of his role in generating this 20% return has been over 10% of annual net income, which must be unsustainable. While the notion of such a chunk of company income being shoveled towards the CEO in McKesson is bad enough, at least Hammergren delivered a return.

At Vornado Realty (NYSE: VNO), CEO Michael Fascitelli earned $64.4m in the last year, despite delivering negative returns of -16%. Or the Omnicom Group (NYSE: OMC), which paid CEO John Wren over $45m for a 1% reduction in its share price. While there is much value to be had from a competent, effective CEO, salaries and benefits of these kinds indicate that some top CEOs at least might be overpaid.

The trouble with CEO’s salaries is moral hazard. When a CEO is rewarded with multiple tens of millions of dollars in exchange for a negative shareholder return, even in a tough trading climate, the propensity to take the responsive types of decisions shareholders demand isn’t automatically guaranteed because the goals of the CEO and the shareholder are not necessarily aligned. CEOs can take risks and make decisions without fear of personal financial loss. From the shareholders perspective, seeing value added to their company and enjoying continued growth is the main objective and driving force. For the CEO who draws a chunky pay packet come rain or shine, these aims aren’t necessarily shared.

How Much Value Does The CEO Add?

Beyond rewards for failure, the actual crux of the issue as to whether America’s CEOs are still being paid over the odds remains whether they can individually add value sufficient to cover their costs and generate a return for shareholders. In some cases, CEOs do a highly effective job at improving shareholder value, and of course securing the right talent at the top is important. In some instances, this is clearly not the case, and it is the shareholders ultimately who suffer the brunt.

But to a large extent, CEOs are beneficiaries of a bidding war for experience (rather than results), and until action is taken to combat these issues the country’s CEOs and the boards that decide their wages will continue to take liberties at the expense of ordinary shareholders. American top CEOs as a rule are rewarded like entrepreneurs rather than management staff, and it might take a significant change in attitudes to reverse this trend at the top.

 

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