3. ARE CEOS PAID TOO MUCH?
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Many intellectuals and journalists allege that CEOs are paid too much (or paid too much relative to workers),
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“a silent killer wreaking havoc on our economy.”
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The more likely truth, however, is that CEO pay largely has to do with competition, in this case the chase for talent.
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it is in the best interests of the board and shareholders to drive a business to be a creator, and high CEO salaries are part of that mix.
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The debates around CEO pay reflect how we deal with the excellence around us, how well we deal with cases in which rewards go to those who have failed,
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top CEOs may make 300 times the pay of typical workers, and since the mid-1970s CEO pay for large publicly traded American corporations has gone up by about 500 percent,
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there aren’t actually many people capable of leading large companies?
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CEO pay mostly—not entirely—reflects the productive contributions of talented individuals to very important companies, rather than corruption, rent-seeking, and personal enrichment.
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limited CEO talent in a world where business opportunities for the top firms are growing rapidly.
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when it comes to CEO pay we can (mostly) trust business.
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The efforts of America’s highest-earning 1 percent have been one of the more dynamic elements of the global economy.
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Economists sometimes speak of CEOs as arbitrary beneficiaries of a variable called “skill-biased technical change.”
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But skill-biased technical change does not fall from the sky; rather, it comes about because it was the vision, deeply held and tenaciously enacted, of a number of CEOs.
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CEOS ARE PAID FOR CREATING VALUE
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One of the most striking features of CEO pay growth is just how much it is tied to the overall performance of U.S. stocks.
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determinants of CEO pay are not so mysterious
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Xavier Gabaix and Augustin Landier,
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the sixfold increase in average CEO pay over the 1980–2003 period can be explained in large part by the roughly sixfold increase in average market capitalization over those same years.
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in bad times CEO pay goes down,
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In other words, it isn’t just an upward ratchet,
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CEOs are some of the biggest critics of CEO compensation for the leaders of other companies.
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If you look at the top-performing teams in NBA history, they are almost always based around (at least) one player who is one of the top few in the NBA and playing at or near the top of his game. Bill Russell, Magic Johnson, Larry Bird, Michael Jordan, LeBron James, and Stephen Curry
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At the same time, not every gamble on a big star—or supposed big star—is going to succeed.
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The New York Knicks poured many millions of dollars into Carmelo Anthony, who is now well over thirty, and they remain a mediocre team
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But how did Anthony get that money? By manipulating the shareholders and board of the company that owns the New York Knicks? No. Anthony offered the promise of something
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since 1926, the entire rise in the U.S. stock market can be attributed to the top 4 percent of corporate performers.
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THE SKILL SET OF THE MODERN CEO
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how to operate its core business,
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As the world has become more financialized, a CEO must have a good sense of financial markets
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Today’s CEOs also must have better regulatory and public relations skills
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If a major company is reputed to be racist or sexist or homophobic,
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American companies are much more globalized than ever before,
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skill requires a knowledge of the global economy that is actually fairly mind-boggling.
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virtually all major American companies are becoming tech companies, one way or another.
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On top of all of this, major CEOs still have to do the job they have always done—which includes motivating employees, serving as an internal role model, helping to define and extend a corporate culture, understanding the internal accounting, and presenting budgets and business plans to the board.
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a good CEO must have a reasonably well-rounded sense of nearly the entirety of the contemporary human experience, whether as worker, consumer, funder, media communicator, or political activist.
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most important CEO skills have shifted from being company specific to being those of a generalist,
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all CEOs require a basic set of finely honed character traits to succeed at the very top of the corporate world.
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on average, top CEO talent helps larger firms proportionally more than smaller firms, and high salaries can be useful as a means of allocating the best talent to their most important uses. If Mark Zuckerberg had been running a midsized financial services company rather than Facebook, that would have been a waste of his talents,
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A study found that when we take such “matching” factors into account, the optimal highest marginal tax rate on CEOs probably should be in the range of 27 to 34 percent.
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some other economists who do not take this factor into account recommend marginal tax rates as high as 70 to 80 percent—they’re focusing on the fact that wealthy people may not always enjoy their marginal consumption very much.
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The individuals who are the major players in private equity firms are very often potential or former CEOs themselves, and the firms they acquire are tightly held, so those individuals are not likely to be ripped off by the CEO of a firm they acquire.
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if we look at the numbers over the period when CEO pay rose so rapidly, we see that law partner compensation rose at roughly the same rate.
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From 1993 to 2010, the pay of top baseball players went up 2.5 times, the pay of top basketball players rose 3.3 times, and for football the multiple was 5.8.
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CEOs gained about as much as the baseball players,
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corporate governance has become a lot tighter and more rigorous since the 1970s. The 1950s and 1960s were much more of a “good ol’ boy”
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That suggests it is in the broader corporate interest to recruit top candidates for increasingly tough jobs.
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the stock market reacts positively when companies announce compensation plans tying CEO pay to stock prices or other long-term indicators
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UN ALTRO PEZZO DEL PUZZLE
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CEO pay has less to do with income inequality than it might seem at first glance.
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very high senior management returns stem from value creation,
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within business firms, returns to higher-tier workers have not risen relative to the pay of the lower-tier workers,
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The main exception to that claim is workers at the very top,
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the main driver of income inequality has been the blossoming of superstar firms that sell an innovative product
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income inequality is mostly about the differences between the superstar companies and the others.
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Building a superstar firm helps those firms raise wages for just about everyone.
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WHEN GREAT CEOS DIE
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A database of 149 sudden deaths of top executives in the United States found that changes in leadership directly affect firm values; that is, when good leaders die, companies tend to lose value.
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It turns out that leader quality accounts for about 5 to 6 percent of the value of the company.
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Sascha O. Becker and Hans K. Hvide
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Hospitalizations are more frequent events than deaths, and the data from hospitalizations tell a pretty similar story
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CEOs are paid less than the value they bring to their companies.
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CEOs capture only about 68 to 73 percent of the value they bring to their firms.
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Lucian A. Taylor,
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typical major CEO captures somewhere between 44 and 68 percent
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you won’t find credible estimates suggesting that major CEOs, taken as a group, are capturing more than 100 percent of their value added.
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the way to get paid a lot more is for your company to do well. It’s quite common for 60 to 80 percent of a top executive’s pay to come in the form of bonuses, options, and other forms of compensation that are directly dependent on how well the firm does.
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“golden parachutes”
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throwing out the CEO can involve a destructive battle. A golden parachute can help ensure that a bad corporate leader will abandon the mess he or she has created and will do so in a relatively constructive manner,
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Second, in some cases the shareholders wish to encourage a CEO to explore risky new strategies that may fail.
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ARE COMPANIES TOO FOCUSED ON THE SHORT TERM?
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In reality, this is usually another complaint about CEO pay. Often the critics charge that equity- and options-based pay for CEOs helps drive this phenomenon,
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It can be very difficult to distinguish between short-termism and an inability to see into the future.
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Usually the short-termism behind the failures isn’t fully revealed until someone with a better long-term vision comes along.
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It is not hard to think of examples where companies made big mistakes because they were thinking too long-term.
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Circa 2018, Jeff Bezos ended up as the richest man in the world, and he achieved that status by sticking with some long-run goals.
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markets are striking a pretty decent balance between short-term and long-term considerations.
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Kenneth French and Nobel laureate Eugene Fama,
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If we look at the CEOs of major corporations, they seem to have pretty long time horizons. If we look at bosses who left S&P 500 companies in 2015, their average tenure in office was eleven years
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In information technology the average life of a corporate asset is measured at about six years, in health care it is about eleven years, and for consumer products it runs from twelve to fifteen years.
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American economy is shifting toward sectors with relatively short asset lives, many of them being service sectors. As a result, what we might need in many cases are more CEOs who are able to make the shift toward a shorter-term orientation.
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What the data show is that in the U.S. economy, R&D expenditure relative to GDP has been roughly constant for about thirty years.
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since services have been growing as a percentage of the American economy, and services R&D is harder to pull off with success, the trend can be read as a signal of a slightly positive overall trend.
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venture capital typically is considered one of America’s big success stories, as I will discuss in chapter 7. American venture capital is highly sophisticated and skilled at taking risks for the prospect of a big payoff. But it is also, in some regards, oriented toward the short term. A venture capital round very often will be capped at ten years.
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Sometimes I’ve heard or read claims that payouts to shareholders represent more than 90 percent of net income for firms in the S&P 500.
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The reality is that major companies are paying out to shareholders about 22 percent of their net income, which is not an unusual or unhealthy figure.
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And money paid out to wealthy shareholders typically ends up invested in some other part of the economy.
SENZA DIRE
