CEO pay vs average worker pay

With your ability to accurately price a CEO's real contribution, I would assume you routinely put your money on the line and sell short the stocks of those companies who overpay.

 

If almost all of them do it, then it's an embedded characteristic. Doesn't mean there isn't a Moneyball way.

 

Let's have Mike Duke start a business, then. Or Tim Cook, for that matter.

 

"Overpaying," as you put it, wouldn't be a binary characteristic. Even if all of them overpay, some would overpay more than others. With your abilities, you should be able to pick out which companies have overpaid the most and make a killing.

 

We'd better cancel all the other threads on here where folks don't have a financial stake in the sports teams then. And if you don't work for Gannett, shit, you'd better not say a word about their financial practices.

Good straw man on the Pauly Shore reference, too. Because, yes, there wouldn't be anyone between Mike Duke and Pauly Shore who could run Wal-Mart.

My point is there's about 30 people at Wal-Mart who could probably run Wal-Mart, and make considerably less. Perhaps your point is Mike Duke is a magic bullet.

 

This would presume overpayment of CEOs correlates to the business practices of the company. It may not. It probably does not. I've seen colleges with absolute buffoons for deans that were terrific because of the professors working around them. Years and years (and years) ago, I worked for a summer lawn company where the owner was six months away from a year-long trip to dry out. He couldn't have told you what day it was. It was still a good lawn service, with his enabling sister doing the books.

 

But you also have to consider the performance of an A-Rod against the performance of a PR person.

True, you probably would be able to find plenty of other PR people who could fill the role, but by paying A-Rod $28 million (or whatever he makes these days), that says that he cannot be replaced very easily. But as the Yankees are proving this year, they've done quite well without him. He's not living up to his value for this year.

Now, like all major leaguers, he has that guaranteed contract, but in the real world, there aren't very many employees who have guaranteed multi-year contracts. If he was like the rest of us on a year-to-year (or really, day-to-day) basis, odds are he would have only made a fraction of that $28 million this year because of last year's performance and the injury. And judging by how the Yankees are doing this year, he probably wouldn't be making as much next year.

Judge A-Rod like a CEO whose performance is poor, and there'd be a lot of carping about him too. Come to think of it, there's been plenty of that. Because his performance, as well as his past attitude, is not living up to his pay package.

Charlie Finley once suggested that if the MLB owners would really be on the ball with free agency, they'd only allow one-year contracts because there would be mass quantities of players competing with each other each free-agency winter for a finite amount of money, which would have made the most valuable players rich, and the less valuable poor. That of course, was dismissed, both for the sheer chaos it would have caused, and because nobody would want to bunt because it could cost them money. If A-Rod was on a year-by-year contract, odds are, he'd be making much less now. Because there wouldn't be too many teams falling over themselves to sign an .050 postseason hitter with a bad hip.

In the Walmart scenario, using the 1983 numbers of 42 times the average worker, the CEO should be making about $1.1 million. Which means that people are looking at what he does to justify earning the extra $19+ million. He may be the best CEO of all time and deserve it. But if his performance is poor, would Walmart be able to get along without him? Probably.

When we look at high salaries, we look to see if they justify their pay. If someone is the among the highest-paid in their industry, I expect that they're among the best in the industry. If they're not, then nobody should be surprised if people get upset about what they're doing to earn their pay. If A-Rod comes back and hits .220 this year, people will boo him. If profits fall and the stock price tumbles, people will complain about the CEO.

 

Maybe. But, just like some first round draft choices turn out to be busts, so could one of the thirty you think could run the company.

It's not that these guys are irreplaceable. It's that the risk involved in replacing them with the wrong person is huge.

You're also discounting the variety of skills a good CEO has. While I suppose you could have talented people working for you, and just be the "decider in chief", you need to understand the financials, the operations, the marketing etc.

But, it's also the ultimate management job, and requires incredible people skills.

A CEO has to decide which initiatives receive funding, which acquisitions get made. A lot can go right, and a lot can go wrong.

And, besides getting the management team working together, he/she has a number of constituencies to please. They have to communicate to all the employees in the company, and keep employee morale high. They have to communicate to investors, analysts, and the entire Wall ST. community. They have to represent the company in the media, and they have to push their company's agenda in the State Capital and in Washington.

This just isn't a skill set the average person has. And, unless the person has already been a CEO, it's not a skill set that can necessarily be evaluated, because he/she has never been asked to do all of these things.

 

Alma, I'm just bustin' your chops, I hope you know that. And I agree with you ... firms frequently overpay for CEOs. But they frequently underpay for CEOs, too. There's a whole literature out there regarding CEO (and, more broadly, top management team) compensation. What draws my ire is the notion that, because CEO X makes 278 times the compensation of his/her firm's average worker, he/she is overpaid. Hell, he/she might be underpaid at 278 times, and another might be overpaid at 28 times. It's way the hell more complicated than that. And this idea that there are untold hundreds/thousands of people qualified to be CEOs? I ain't buying it. If that were the case CEOs wouldn't be able to command the salaries they command. You can quibble that, in the case of CEO duality (where the CEO's both CEO and board of directors chair, so he/she can over time control the composition of the board), the CEO might be more likely to be overpaid. But that's not enough leverage to explain those multiples.

 

Mike Duke didn't start Walmart. He joined it in 1995. It already was a successful business.

It's a lot easier to grow a company when the company is already successful.

A better comparison would be someone like Bill Gates, who built his company from the ground up.

 

This guy Henry Mintzberg (of whose research I am a big fan) has done a good bit of work regarding the roles that a CEO plays. This isn't one of his scientific pieces, but it gives a pretty fair accounting of: 1) what's expected of CEOs; and 2) why there might not be so many people with CEO potential:

http://www.di.net/articles/the-role-of-the-ceo/