US CEOs Underpaid

Generali

http://www.haygroup.com/downloads/us/WSJ%20Hay%20Group%202014%20CEO%20compensation%20study.pdf

CEOs are employed by shareholders in order to increase the value of their investments.

On average, over the last year, the total shareholder return (or TSR) to investors measured as change in share price + dividend was 34.6%, company net income rose by 6.6% whereas the poor CEOs got a measly 4.1% rise on average to just $3,700,000.

CEO pay should reflect company success or failure surely?

princeofpounds

Generali, you might want to watch out - your straw man might blow away in all this wind...


I think we all know that the volatility in the value of businesses is often (indeed probably usually) dominated by factors the CEO has little to do with.


Perhaps we should all pay Bernanke and Yellen a few billion to thank them for inflating the value of shares AND houses. Wizards.

Generali

princeofpounds wrote: »

Generali, you might want to watch out - your straw man might blow away in all this wind...


I think we all know that the volatility in the value of businesses is often (indeed probably usually) dominated by factors the CEO has little to do with.


Perhaps we should all pay Bernanke and Yellen a few billion to thank them for inflating the value of shares AND houses. Wizards.

Just trying to stimulate some debate.

Ignoring TSR, if a CEO has increased profits by 6% in a sustainable way then a pay rise of 6% seems reasonable.

princeofpounds

if a CEO has increased profits by 6% in a sustainable way then a pay rise of 6% seems reasonable.

Well, certainly what I said applies to shareholder returns, and in truth much (most?) of the time it probably applies to profits too - the business cycle probably matters more.


Furthermore, even if the CEO had made a good decision that was directly attributable to him/her, why should they receive a proportional amount of money? No other workers do, even if value-add is directly attributable to them. Even the likes of hedge fund managers have a minimum hurdle rate before they get their cut.


And that's before you even start on the difficulty of attributing value, measuring long-run performance consequences etc.

Generali

princeofpounds wrote: »

Well, certainly what I said applies to shareholder returns, and in truth much (most?) of the time it probably applies to profits too - the business cycle probably matters more.


Furthermore, even if the CEO had made a good decision that was directly attributable to him/her, why should they receive a proportional amount of money? No other workers do, even if value-add is directly attributable to them. Even the likes of hedge fund managers have a minimum hurdle rate before they get their cut.


And that's before you even start on the difficulty of attributing value, measuring long-run performance consequences etc.

Lots of workers get money in proportion to their revenue impact. Even in retail sales I used to get commissions that made up the majority of my income. One place I worked at simply guaranteed a minimum level of income and if your commissions exceeded that you earned only commission.

Both the hedge funds I worked for had very simple 2/20 or 1/10 fee structures with no hurdles. We took 10 or 20% of any value added in nominal terms to investments. The point of an absolute return fund (and the benefit to the fund manager) is they can make a motza in a bull market.

Oh and I think it's a little unfair to describe my argument as a straw man if I may say.

CLAPTON

Generali wrote: »

Just trying to stimulate some debate.

Ignoring TSR, if a CEO has increased profits by 6% in a sustainable way then a pay rise of 6% seems reasonable.

if one takes the view that the CEO is accountable and responsible for the rise in profits then it would be reasonable for the CEO to be accountable for falls in profits (and actual loses) and of course any and all errors and criminal acts that that place on their watch.

Generali

CLAPTON wrote: »

if one takes the view that the CEO is accountable and responsible for the rise in profits then it would be reasonable for the CEO to be accountable for falls in profits (and actual loses) and of course any and all errors and criminal acts that that place on their watch.

I would expect a CEOs pay to be linked to how the owners of the business do so if profits fall so should the pay of the CEO and if large losses are made then perhaps the CEO should go unpaid, depending on circumstances.

I'm not sure you can blame the CEO for every action of every employee of the company though. If a back office staff member is dealing drugs on the office telephone (as was the case at one bank I worked at) then I don't think the CEO should be busted as an accessory.

CLAPTON

Generali wrote: »

I would expect a CEOs pay to be linked to how the owners of the business do so if profits fall so should the pay of the CEO and if large losses are made then perhaps the CEO should go unpaid, depending on circumstances.

I'm not sure you can blame the CEO for every action of every employee of the company though. If a back office staff member is dealing drugs on the office telephone (as was the case at one bank I worked at) then I don't think the CEO should be busted as an accessory.

Well, maybe we should say that the CEO should be accountable for all action that contributed to the profits and hence his salary, as a quid pro quo for receiving the rewards

michaels

Shouldn't performance be assessed relative to the sector? If company A ups profit by the 6% mentioned but competitor B makes 10% surely CEO of A has a tually underperformed?

Generali

michaels wrote: »

Shouldn't performance be assessed relative to the sector? If company A ups profit by the 6% mentioned but competitor B makes 10% surely CEO of A has a tually underperformed?

I guess it's what you want as an investor and what you want from your company.

If you are seeking a relative return then you should be voting for remuneration on a relative basis, if seeking an absolute return then you should vote for remuneration on an absolute basis.

Even then there are traps. What if B made 5% of it's increased profits by overhedging and making trading profits outside their core expertise (as Procter & Gamble did back in the day)? That's a strategy bound to end in tears.

kabayiri

If you can attract and retain the CEO delivering the results for £X then why rush forward and give them £X+1?

In the UK, we take a different route. We appeal to a CEO's vanity by offering them an MBE or some such for "services to industry", or even a knighthood

(Unless you are an Egyptian retailer done good who bought a fancy big shop in London, in which case you are stuffed by the establishment)