[Toshi]

i've often wondered about this but never really took the time to dig in. i slept this afternoon having worked all day and night yesterday so am all too awake while the girl is soundly asleep in the next room. seems like a good time to look into CEO pay.

warren buffett is paid $100k a year and gets no stock options. yet without extravagant compensation he continues to manage berkshire hathaway very well from all accounts and measures. how can this be reconciled with the quite extraordinary pay awarded to CEOs that have recently been thrust into the public's view thanks to their companies' need for repeated bailouts at the taxpayer's expense?

does outlandish compensation produce better management as measured by long-term results? is there really any justification for it now that the old saw, that the market knows best, has been put to rest by the failure of so many of these stalwart american companies?

as a starting point i'll dig around for some numbers. without knowing exact figures offhand i'm going to come up with an arbitrary list of companies:

Berkshire Hathaway
Ford
GM
Honda
Toyota
Microsoft
Boeing
Airbus
[average US company]
[average Japanese company]
[average European company]

 

[Toshi]

Berkshire Hathaway

market cap $121.7B as of today at a P/E ratio of 15.56. $13B annual income in 2007.

CEO: Warren Buffet. $100k salary, no stock options, has been at the helm as chairman and later CEO since at least 1970 after founding the company around 1962.

Ford

market cap $13.7M as of today (yes, M per google finance -- must be B). P/E ratio nonsensical as it lost money the last several years, $12.7B in 2007.

CEO: Bill Mullaly. was paid $28M to run ford for four months in 2007.

 

[Toshi]

GM

market cap $1.37B today, and that's after multiple taxpayer billions have been poured in. neg P/E ratio. $38B annual 2007 loss.

CEO: Rick Wagoner. $8.5M salary last year, $22M/5 yrs. been with the company for 28 years.

Honda

figures not easily available to my addled mind on google finance as it's listed in tokyo. 4.24% annual 2008 profit margin listed there.

CEO: Takanobu Ito. exact salary not released but in 2006 and 2007 he was paid between $11-12M. oh, wait, i meant that that $12M was the sum of the salaries of the top 21 executives at Honda.

 

[Toshi]

Toyota

figures not easily available to my addled mind on google finance as it's listed in tokyo. 5.80% annual 2008 profit margin listed there.

CEO: toyoda-san just stepped to the helm. his predecessor was Katsuaki Watanabe, who made less than $1M/year and did quite well for the company until this year, where toyota is expected to post its first full year loss EVER.

Microsoft
Boeing
Airbus

too lazy to look up these. will skip to the CEO:worker earnings ratios.

[average US company]
[average Japanese company]
[average European company]

don't know about euro stats but here are the 2005 figures courtesy of PBS:

in case those cute graphics didn't convey this:

in 2005 the average American CEO:worker pay ratio was 475. the equivalent ratio in Japan was 11.

how can this even remotely be justified?

 

[valve bouncer]

how can this even remotely be justified?

Monkeys and peanuts mate. Shame though that it appears now the ridiculous amounts paid to some CEOs just resulted in well paid monkeys.

 

[ridiculous]

Are these figures taking year end bonuses into account. I know alot of top level financial guys don't get paid very much in comparison to what their year end bonus might be. For example CFO of GS might get paid $250 as his salary. But if the bank does well webcause of him his bonus maybe $10M +.


Also another stat for your averages. Lewis Campbell CEO of Textron systems, former CEO of GM made $20M last year. Company is in the crapper right now.

 

[Defenestrated]

I wish I could get paid the big bucks to run companies into the ground.

 

[JohnE]

Although their pay is ridiculous, can you fairly place ALL blame on a CEO for a company tanking?
(Honest question, btw.)

 

[ridiculous]

Although their pay is ridiculous, can you fairly place ALL blame on a CEO for a company tanking?
(Honest question, btw.)

An interesting question, but when you think about it CEOs are considered to be all knowing. So every action/mistake no matter how small is to their credit.

 

[3D.]

Although their pay is ridiculous, can you fairly place ALL blame on a CEO for a company tanking?
(Honest question, btw.)

I think you can place a good portion of it on them… ceo compensation and some of the outlandish company profits that were being had, do nothing for a healthy long term economy. Due to our highly litigious society there is no incentives for these guys to pump it back in through means of new companies and industry. They generally make the profits out of thin air and reinvest it in something they can collect interest on, once more making a profit with zero contribution to society and void of redistribution.

Eventually the profits suck the funds out of the system leaving these failing ceo’s nothing left to harvest, and society nothing left to borrow.

 

[Silver]

Although their pay is ridiculous, can you fairly place ALL blame on a CEO for a company tanking?
(Honest question, btw.)

When they take all the credit for the good times, sure.

How many times didn't we hear how indispensable the CEO was to Company XXXX over the last 10 years?

 

[Toshi]

Although their pay is ridiculous, can you fairly place ALL blame on a CEO for a company tanking?
(Honest question, btw.)

When they take all the credit for the good times, sure.

How many times didn't we hear how indispensable the CEO was to Company XXXX over the last 10 years?

yup. either they're worth their pay and should be held responsible -- see toyota's CEO stepping down after just a single quarter of losses -- or they weren't really holding the reins, in which case their salaries are not based in any sort of reality.

 

[Silver]

yup. either they're worth their pay and should be held responsible -- see toyota's CEO stepping down after just a single quarter of losses -- or they weren't really holding the reins, in which case their salaries are not based in any sort of reality.

My answer is that they aren't worth their pay, they sometimes/oftentimes aren't responsible, and it is the corporate structure and culture in the United States that allows high level executives to engage in an incredible amount of rent-seeking behavior with regards to their compensation.

 

[splat]

in 2005 the average American CEO:worker pay ratio was 475. the equivalent ratio in Japan was 11.

how can this even remotely be justified?

Toshi, how has this ratio changed over time ? like back in 60s, 70s, 80, etc etc

 

[Defenestrated]

Toshi, how has this ratio changed over time ? like back in 60s, 70s, 80, etc etc

Figure 6: CEOs' pay as a multiple of the average worker's pay

Figure 7: CEOs' average pay, production workers' average pay, the S&P 500 Index, corporate profits, and the federal minimum wage, 1990-2005 (all figures adjusted for inflation)

Source: Executive Excess 2006, the 13th Annual CEO Compensation Survey from the Institute for Policy Studies and United for a Fair Economy.

 

[stevew]

how about 300,000K as a diversity specialist at a hospital......and then the position disappears when your husband becomes president.

overpaid?

 

[Silver]

how about 300,000K as a diversity specialist at a hospital......and then the position disappears when your husband becomes president.

overpaid?

For sure.

it is the corporate structure and culture in the United States that allows high level executives to engage in an incredible amount of rent-seeking behavior with regards to their compensation.

 

[splat]

Figure 6: CEOs' pay as a multiple of the average worker's pay

Thank you thats what I thought. Pretty disgusting.

I guessing the the Dot Bombs of the late 90's Really ignited it upward.

 

[Defenestrated]

I pretty much sh!t myself when I found that graph.

 

[jimmydean]

What about Tyco and some of the stuff the CEO did on the company dime? Purchasing multtmillion dollar pieces of art to decorate his office the company paid for. A trip and $2M birthday party for his wife charged as a company expense.

I'm all for a good salary for CEO's, but it should be in relation to others in the company. The idea of performance bonuses is where the big money should be paid.

 

[Silver]

The idea of performance bonuses is where the big money should be paid.

You have to be very careful with those, and how they are structured.

Those bonuses are a not insignificant part of the reason the global economy is royally ****ed...

 

[jimmydean]

You have to be very careful with those, and how they are structured.

Those bonuses are a not insignificant part of the reason the global economy is royally ****ed...

Agreed.

I remember my old boss used to drive a BMW 3 series convertible he paid cash for with a part of a quarterly bonus at Dell in the late 90's. He averaged $40k a quarter in bonuses and $200k in salary to be VP of engineering. A good chunk of change, but not what I considered outrageous.

I also remember the CEO at McAfee getting busted stuffing the sales channel (shipping product to distributors and booking it as sales only to have it shipped back later unsold) to make numbers so he could get his bonus.

<edit> None of us at McAfee got bonuses that year because of it.