The compensation of corporate executives is one of journalists’ favourite piñatas. Media report after media report claims that CEOs are overpaid and ideally should be tarred and feathered and sent running naked through the streets. Ok, I made the last bit up, but the claims that CEOs are overpaid are widespread. Meanwhile, – and the irony here is almost too obvious –
It's exactly the same here in Australia. CEOs are easy targets and with some good reason. Same weak arguments are run all the time about needing to attract the best talent blah blah blah but you have to keep in mind that there is only one CEO in each company, so whilst they are being overpaid at least there aren't rooms full of them. My theory on how this happens is that the real problem is that boards are overpaid, and in an attempt to distract the shareholders and make it look like THEY aren't overpaid, they throw lots of cash at the CEO. The flip side to this of course is that given half a chance, most senior C-suite execs would happily have a crack at being the CEO for a LOT less pay than the current one, and sometimes this happens unintentionally when someone ends up as "acting CEO" then completely nails the job, thereby making it rather embarrassing as to why they weren't considered for the role in the first place.
Well. Just an idea. I guess, the whole point of the conventional one-man show of a strong-man CEO who-does-it-all at the top of a company is just a concept from the 19th century and... well, outdated?
Industries, business models, firm routines, technologies and organisations are evolving, so is the role of CEO. Performance measurements need to change accordingly, and so does the adequate compensation. At least for my gut-feeling, the latter should be lower, especially compared to the guys in the company that are really pushing firm competitiveness and profits, i.e. sales or R&D etc.
Maybe the average manager is just getting better (though I' like to how this is measured/made up), after all with an aging population the average manager of current times would be older and perhaps more experienced than the average manager of yore?
I hope you are right, but I really wonder how the average manager is getting better while the CEOs are staying the same in terms of general ability. If true that would still be a damning verdict since it would say that CEOs don't develop their skills the same way the average manager does.
'America is a country whose children score low in math and science but off the charts in self-esteem. A study of eight developed countries found that U.S. students were dead last in math skills but number one in confidence in math skills, even though they suck at it. Yes, we’re number one in thinking we’re number one'
Isn't (one of) the key trait(s) for a ceo not exceptional ability / intelligence but the willingness to put in 60/80 workweeks during a career? And luckly for us outsiders ceo's are aided by numerous external quality consultants - for a decent fee.
In other news Xi Jinping's thoughts fuel an LLM. I wonder who's next...
My theory is that CEO compensation is an incentive to the striving executives down the food chain. It's a lot cheaper to pay "the star" a lot and give the second team (VPs) cheaper salaries. The chance to get to be CEO and that prize is what motivates them.
Interesting theory. And In a couple of weeks, I will publish a post about pay transparency that says that people work harder if they know how much money their superiors make. It's a motivation to climb the career ladder.
It is a strange thing.If we look at a sports star they are the elite They can be paid more than the CEO of a company that employs hundreds of thousands of people.The CEO is the elite.Some are good,some are not,the same as every job.
Some can excel at one company,when they move to another company the magic disappears.The support team gelled,as a team they were excellent,on an individual basis they were not so good.
One thing is certain,if I buy shares in a company and they perform well over say 10 years,were the team worthy of their hire.Some companies I have have performed better than Buffett for a long time.The CEOs change after 10 years or so,they take the job of chairman.The next CEO has been trained within the organisation.The chair is there as a guide? The next 10 years they perform well again. Over the 20 year period they turn $10K into $200K for me.This continues again for the next 10 years The shares are now around the $900K mark.
The company has grown,the number of employees has greatly increased.,net profit has been around the same % age. Dividends have been around the same % age,say 4%. So I start with $400 in dividend income.,and retire with $36K in dividend income. I think they were worth the hire.
A different company,same scenario.They change CEO every 3 or 4 years Hunting for the star performer.Nobody has a chance to settle for the long term,we want quick results.They perform around average ,just under perhaps .They turn $10 K into $300K for me.
Perhaps Ferguson at Man UTD would be the same.Astonishing results for 25? years .Then a bit of a void,change manager every 18 months.
I don't think the variables are taken into account,just a case of ,how much did he get!
That is huge compared to my wage..The performance is forgotten about over the long term.Overall the stars and the not quite stars,all roughly qualified the same,with vastly different performance.
It's exactly the same here in Australia. CEOs are easy targets and with some good reason. Same weak arguments are run all the time about needing to attract the best talent blah blah blah but you have to keep in mind that there is only one CEO in each company, so whilst they are being overpaid at least there aren't rooms full of them. My theory on how this happens is that the real problem is that boards are overpaid, and in an attempt to distract the shareholders and make it look like THEY aren't overpaid, they throw lots of cash at the CEO. The flip side to this of course is that given half a chance, most senior C-suite execs would happily have a crack at being the CEO for a LOT less pay than the current one, and sometimes this happens unintentionally when someone ends up as "acting CEO" then completely nails the job, thereby making it rather embarrassing as to why they weren't considered for the role in the first place.
Well. Just an idea. I guess, the whole point of the conventional one-man show of a strong-man CEO who-does-it-all at the top of a company is just a concept from the 19th century and... well, outdated?
Industries, business models, firm routines, technologies and organisations are evolving, so is the role of CEO. Performance measurements need to change accordingly, and so does the adequate compensation. At least for my gut-feeling, the latter should be lower, especially compared to the guys in the company that are really pushing firm competitiveness and profits, i.e. sales or R&D etc.
Maybe the average manager is just getting better (though I' like to how this is measured/made up), after all with an aging population the average manager of current times would be older and perhaps more experienced than the average manager of yore?
I hope you are right, but I really wonder how the average manager is getting better while the CEOs are staying the same in terms of general ability. If true that would still be a damning verdict since it would say that CEOs don't develop their skills the same way the average manager does.
Could there possibly be a connection:
'America is a country whose children score low in math and science but off the charts in self-esteem. A study of eight developed countries found that U.S. students were dead last in math skills but number one in confidence in math skills, even though they suck at it. Yes, we’re number one in thinking we’re number one'
https://www.thefp.com/p/bill-maher-american-kids-are-way?utm_source=post-email-title&publication_id=260347&post_id=144894899&utm_campaign=email-post-title&isFreemail=true&r=6mos7&triedRedirect=true&utm_medium=email#:~:text=for%20America%E2%80%99s%20youth%3A-,America%20is%20a,-country%20whose%20children
Isn't (one of) the key trait(s) for a ceo not exceptional ability / intelligence but the willingness to put in 60/80 workweeks during a career? And luckly for us outsiders ceo's are aided by numerous external quality consultants - for a decent fee.
In other news Xi Jinping's thoughts fuel an LLM. I wonder who's next...
https://www.scmp.com/news/china/politics/article/3263530/china-rolls-out-large-language-model-based-xi-jinping-thought
My theory is that CEO compensation is an incentive to the striving executives down the food chain. It's a lot cheaper to pay "the star" a lot and give the second team (VPs) cheaper salaries. The chance to get to be CEO and that prize is what motivates them.
Interesting theory. And In a couple of weeks, I will publish a post about pay transparency that says that people work harder if they know how much money their superiors make. It's a motivation to climb the career ladder.
It is a strange thing.If we look at a sports star they are the elite They can be paid more than the CEO of a company that employs hundreds of thousands of people.The CEO is the elite.Some are good,some are not,the same as every job.
Some can excel at one company,when they move to another company the magic disappears.The support team gelled,as a team they were excellent,on an individual basis they were not so good.
One thing is certain,if I buy shares in a company and they perform well over say 10 years,were the team worthy of their hire.Some companies I have have performed better than Buffett for a long time.The CEOs change after 10 years or so,they take the job of chairman.The next CEO has been trained within the organisation.The chair is there as a guide? The next 10 years they perform well again. Over the 20 year period they turn $10K into $200K for me.This continues again for the next 10 years The shares are now around the $900K mark.
The company has grown,the number of employees has greatly increased.,net profit has been around the same % age. Dividends have been around the same % age,say 4%. So I start with $400 in dividend income.,and retire with $36K in dividend income. I think they were worth the hire.
A different company,same scenario.They change CEO every 3 or 4 years Hunting for the star performer.Nobody has a chance to settle for the long term,we want quick results.They perform around average ,just under perhaps .They turn $10 K into $300K for me.
Perhaps Ferguson at Man UTD would be the same.Astonishing results for 25? years .Then a bit of a void,change manager every 18 months.
I don't think the variables are taken into account,just a case of ,how much did he get!
That is huge compared to my wage..The performance is forgotten about over the long term.Overall the stars and the not quite stars,all roughly qualified the same,with vastly different performance.
Hi Joachim, very interesting. Would you have a link to the Decressin study please ? Tried to look for it but no luck.
It’s linked in the post but here you go again: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4582086
Joachim, I think that your Substack account has been hacked, as I received spam messages in reply to some comments.
Thanks for letting me know. I will change my password then.