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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  • DaveF

    CEO’s do a difficult job, and the general perception that they are overpaid causes me frustration. Most ordinary people would be unable to do the job these men and women do, and while the figures do seem substantial, you have to be prepared to pay through the nose if you want top talent.

  • samanthapl

    CEOs should be paid off of merit. Some of them are very deserving of their fat pay checks, others are not. Companies definitely want to pay top dollar to keep top talent, but what if that talent then does not perform? Perhaps a better system is to decrease the salary but increase the bonuses?

  • DaveF

    I’m all for performance related pay over salary, but there seems to be a culture that rejects bonuses for some reason. I think most ordinary people view a salary as the basic and bonuses as a luxury ‘fat cat’ payment, regardless of the balance between the two. A move towards bonuses as opposed to salary might work, but it would have to be achieved across the board in order to attract the right talent. After all, why agree to performance related remuneration when the next company is offering you an equal salary with no ties to performance?

  • mrego123

    As the comments above stated, you get what you pay for. If you want a mediocre leadership, expect mediocre results.

  • samanthapl

    Agreed Dave, it would certainly have to be a cultural change. I also agree that as a society, the populous generally has a poor opinion on executive’s bonuses. They do see it as fluff money, although I think to a certain degree it is also sour grapes. When in reality, the bonuses in some companies go all the way down to lower management or even to labor (ie profit sharing programs). If the company does well, so does everyone else. Seems a good business model to me.

  • meikoacebo

    Pay should be commensurate with performance. If you look at the metrics of performance bonuses of CEO’s, there is a big incentive for them to misstate the figures to earn the targets. I suggest a good metric would be free cash flow and shareholder wealth (i.e., return on invested capital) rather than accounting earnings.

  • samanthapl

    That’s a great idea. Unfortunately most CEOs also have seats on the board of directors of their respective corporations, and therefore drastic change in their compensation packages is unlikely to change.

  • mrgambale@gmail.com

    CEO pay has always been a subject of controversy, but I agree that you get what you pay for. It certainly is a tough job and one requires a lot of time, so the pay is justifiable.

  • Lillie

    CEO pay is not always what it seems. What I find amazing is the money they garner when they retire.

  • mrgambale@gmail.com

    I agree, the options they receive and the golden parachute packages they receive at retirement are tremendous and should be reviewed based on performance not tenure.

  • samanthapl

    Perfect example of a CEO who received bonuses when the company didn’t perform: Hostess. Even the bankruptcy judge pointed out the injustice of the bonuses which had been paid to executives when the company asked to liquidate.

  • Tyokunbo

    I agree it’s a tough job, but pay should be commensurate with performance.Also how do you determine who should take credit between the CEO and his staff?

  • mrgambale@gmail.com

    The hostess situation was a bit much. Considering that the union and the company ere so far apart the CEO must be held responsible.

  • samanthapl

    The buck should stop with the CEO. A good manager can motivate his or her staff to perform.

  • JoshG

    Short answer – yes. It makes sense to pay them a lot, but there’s no reason they should receive the GDP of some countries. No human being needs that much money, and if anything it just reinforces a sort of hubris that can be dangerous to the CEO’s company. Just look at Brian Moynihan.

  • mrgambale@gmail.com

    The CEO is absolutely responsible as he is the commander and chief. Any mishaps in the company reflect negatively on the company, and always drags down the CEO with them.