16 thoughts on “Are CEOs Overpaid?”

  1. In case identifying him as a UC economics professor isn’t enough:
    “Kaplan … also serves on public company and mutual fund boards.”
    And, amazingly, he concludes that corporate boards are doing a great job.

    1. Silly Quercus. Didn’t you know that UC economists are immune to the nudges of economic incentives?

      1. Can’t we lay off the ad hominems? I usually assume that somebody is truthful unless they are a professional Republican or otherwise shown to be a proven liar. AFAIK, Kaplan is neither, and he is well-credentialled.

        James Wimberley and Anonymous, downthread, do some good substantive knife-work on Kaplan.

        1. I don’t think that it’s unreasonable to tweak the geographical source of the “nudge” meme with an actual instance where it probably holds true, as demonstrated by JW and Anonymous below. I do get really weary of the faux naivette displayed by a comment like this. These people (the UC Chicago crowd) aided and abetted all the disasters of the last 15 years, starting with the law and economics crap, and interesting how Posner for instance is walking back a lot of his previously assumed charity. Grow up and look around you.

        2. First, he’s recommended by Mathew Kahn, who has established his credentials quite soundly on this blog. Negatively.

          Second, at this point, after the Great Financial Crash and the general failure of neoliberalism, being an econ guy from U Chic seriously detracts from one’s credibility.

  2. Kaplan’s finding that estimated (ex-ante) CEO pay has fallen since 2000 is highly sensitive to the choice of baseline. If you take 2002 as the base, CEO pay has plateaued not fallen. Eyeballing the chart, there was simply a pay bubble round 2000. Statistics fail?

    The finding that CEOs don’t do significantly better than others in the top 0.1% is unsurprising and does not answer the most common left-wing conspiracy theory. This is not that CEOs use their personal power to enrich themselves only, but that the working rich as a group conspire to keep each other rich: executive pay committees are composed of other overpaid executives and CEOs.

    The lecture could have done with some international comparisons. Why are American CEOs so much better paid than say German ones, for equal performance?

    1. I’m not sure if Germany makes for a good comparison with respect to CEO pay, given the lack of similarities between German and American corporate governance structures.

      Germany has a different board system. As in most other European countries, publicly traded companies in Germany have a two-tier board system, comprising an executive board and a supervisory board, with the supervisory board controlling the executive board. The has its pay set by the shareholder assembly, so there’s a somewhat more limited room for mutual backscratching when it comes to setting executive pay.

      As a German speciality, the supervisory board is comprised in roughly equal parts of employee and employer representatives (with employer representatives always having the tiebreaking vote), and the employer representatives also being elected by the shareholder assembly.

      (Note that while the above sounds nice in theory, in practice it’s not THAT effective as a control mechanism, and also has downsides; but it’s not ineffective, either.)

      Japan is probably the more interesting counterexample, as its corporate governance structure is much closer to the American model and Japanese corporations still do not pay their executives nearly as much. The reason here seems to be (as in many other countries that otherwise follow the US model) to be primarily cultural (in particular, the cooperation-focused style of Japanese work ethics).

      1. That’s actually the point – German organizations are different, resulting in far lower CEO pay, but without the horrible failure which our right-wing tells us should happen due to CEO’s not being paid vast amounts.

        1. Yes, but let’s be realistic. Could you realistically expect Congress to enact German-style codetermination (questions of constitutionality aside) in America? Would you want to? Even a two-tier board system is something that I’d consider problematic.

          Also, as a I mentioned, the German model does have its share of downsides that you have to account for. A major one is that it’s often being used as an institutionalized way for gaining political influence, by giving politicians cushy positions on supervisory boards.

  3. The NBER doesn’t seem terribly persuasive, although it makes some interesting points. A few comments:

    – The turn of the millennium (~1998-2002) is skewed by the presence of the dot com bubble. Since CEO compensation was heavily influenced not just by the buoyant economy but by the significantly elevated value of stock-based incentives, it’s not surprising that there was an increase here.

    – The comparison with comparable members of the 0.1% does not strike me as compelling, for the reasons James notes above, but also because one need not posit an active “conspiracy” to believe that incentives exist to persuade these actors toward behavior which is mutually self-reinforcing.

    – The speech fails to engage with the basic question of equity in CEO pay in a meaningful way. It is true that CEO tenure is shorter than in the past, and indeed, much of these tenure issues are related to short-term public stock performance. However, the most potent complaints about “overpayment” of CEOs center around how much they are actually able to 1) influence these performance fluctuations in a meaningful way, and 2) obtain rewards which are in line with their performance. With respect to the first point, it seems likely that over the short term (i.e., the few years for which the CEO is employed) an executive’s ability to dramatically change the trajectory of a large enterprise is quite limited. For the second, perhaps the best point is around golden parachute packages for fired CEOs – which often include substantial compensation even when the executive departs involuntarily. (See, for example, the recent E*Trade firing of CEO Steven Freiberg, who will receive $13M in severance despite apparent dismissal for poor performance.)

  4. And, CEO pay today is still extremely high relative to typical household income.

    This is a Randian analysis: The indispensables are paid properly…and it’s not really germane that the dispensables are getting the shaft. John Galt, baby!

    What would happen if this analysis considered “typical household income” as being as worthy of value as CEO income? That is, what if (shudder, gasp, “no way”) morality played a role in compensation?

  5. As a society, we have been shoveling money to the top 0.1% for 40 years, so it is hardly unsurprising that the cream has not significantly outperformed it nearest peer group.

  6. Other people have pointed out the cherry-picking for dates and the foolishness of comparison to the rest of the top 0.1% (who somehow aren’t beneficiaries of any power imbalances), so I’d like to point out a few other things:

    1)Focusing on CEO pay is also a red herring. People complain about CEOs because they’re the most visible and because the word fits easily in a headline. But the problem involves the pay of the entire set of top management (usually the named compensation group in annual reports)
    2) Publicly held vs privately held is useless without a comparison of sectors. Privately held skews to finance, where gains have been outsize.
    3) Focusing on realized pay, especially over a short time, misses the point in two ways: by definition, realized stock gains will track stock price in a given year, and insofar as executive defer exercise of options, actual compensation happens in the out years beyond the scope of the study.
    4) Measuring CEO pay against market cap over the long term misses the fact that market valuations of firms have changed substantially. Typical P/E has gone up, and many more stocks are held for longterm appreciation rather than income, compared to the first half of the 20th century. (And, of course, there’s nothing at all that says CEO pay should be based on market capitalization rather than, say, change in capitalization or earnings.)

  7. Seconding anonymous and Paul — the run-up in total compensation seems to track the stock bubble, as you’d expect given that Kaplan’s method is to count the actual money the CEOs realize from their stock options. But this may just mean that CEOs get compensation packages that allow them to extract a lot of money from the company when the stock is high and a somewhat less large amount when the stock is low. Privatizing gains and socializing losses on a smaller scale.

    This is presumably the argument for using grant-date pay rather than realized pay; a lot of Kaplan’s observations seem to be explained by the simple fact that CEOs’ pay packages are more valuable when the stock price rises.

  8. Isn’t there a fundamental problem with looking at fluctuations in CEO pay to determine whether their pay level is too high?

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