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CEO Pay: Money Well Spent
CEOs, some declare, make too much money. The basic premise of this claim is that the ‘excessive’ pay is undeserved–-that executives take home runaway paychecks regardless of performance. Others say that no matter how well a CEO performs, no one is worth millions of dollars. They point to the gulf between what a CEO earns compared to his lowest paid worker-–as if the mere fact of making more money is proof of undeserved income. The government, they believe, should forcibly take away the ‘excess’ money, or else force companies to limit executive compensation.
But this argument leaves out just how valuable a CEO can be. Consider some examples:
Jack Welch took General Electric revenues from $26.8 billion in 1980 to nearly $130 billion in 2000. About 276,000 employees scattered in over 100 countries worked under his command. He simplified the managerial structure and directly interacted with several thousand GE employees every year. Jack Welch’s ability to lead more and manage less–to recognize and reward the most talented managers–is still examined in business classrooms all over the world. Welch’s salary, which grew from $4 million to $16 million, seems paltry when one considers that under his leadership GE grew from a company worth $14 billion to $410 billion.
Or consider Kenny Troutt. With a single-minded focus on succeeding, he worked at construction jobs to pay for college. He founded his own company, Excel Communications, and used multi-level marketing to offer long distance phone service to his customers. From nothing, he created a company worth $3.5 billion when he sold it to become a self-made billionaire.
The legacy left by individuals like Kenny Troutt and Jack Welsh, extraordinary though they are, is that in a land of opportunity, dreams can be realized. It takes a determined focus on acquiring the skills necessary to effectively lead a large organization. The work involved is immense, and it is a rare man who is willing to undertake such an effort. No wonder then that stock holders jump at the opportunity to have such people lead their companies. No wonder that these individuals earn such high salaries.
They’re worth every penny.
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The Undercurrent's cultural commentary is based on Ayn Rand's philosophy, Objectivism. Objectivism, which animates Ayn Rand's fiction, is a systematic philosophy of life. It holds that the universe is orderly and comprehensible, that man survives by reason, that his life and happiness comprise his highest moral purpose, and that he flourishes only in a society that protects his individual rights.Event Calendar
Dear Shabana:
A very well written article. How about those who mis-manage the company, drive the share prices down, and still rake in multi-million dollars with pay packages going up each year? (eg., Philip Schoonover the ex-CEO of Circuit City) I think CEOs compensation should be merit and accomplishment(s) based.
Keep the articles coming. Really enjoyed reading it.
Best regards,
Kamesh
Kamesh, what you say is true of every profession. Not every teacher, nurse, doctor, secretary, laborer, etc. is worth the salary they are paid. Teachers can mismanage, laborers can snooze on the job …. Only CEOs are singled out and attacked. One could say that teachers should be paid based on their accomplishments and student test results!
Since, CEOs are singled out for attacks, they must be defended. If a CEO is not worth the money, the board can always fire him. Ofcourse, incompetence is not always curbed in CEOs, teachers and so on.
But singling CEOs - the most successful people - for especially hostile treatment is unjust.
I think CEO pay would be more merit based if corporations lost their limited liability status and instead split liability among the ownership, officers, board, etc. This would mean that they really were taking the risks that merit such rewards.
I see limited liability as a form of special treatment that the government shouldn’t be providing.
Any thoughts?
I recommend Ludwig von Mises’s “Profit and Loss.”
http://mises.org/books/profitloss.pdf
It explains and defends entrepreneurship.
Several points in response to Justin O.
First, although greater risk is generally associated with greater reward in investing, it is not *risk* that merits a reward for the CEO. It is his productive achievement that merits it. This is precisely the point of Ms. Insaf’s post. A CEO manages a complex organizational structure and makes difficult strategic decisions that require significant experience and faultless judgment. Fortune 500 companies just don’t pop into existence out of thin air.
Second, there would be no incentive to form a corporation if you could not limit your liability. Imagine if you were personally on the hook for both billion dollar lawsuits and billion dollar company debts? There’s not a person alive who would take that kind of risk. So you would lose all of the incalculably valuable economies and efficiencies that the cooperative division of labor within a company provides.
But finally, limited liability isn’t a random accident of history. There is an objective reason for treating a company as an independent legal entity, with an identity that is separate from that of it’s individual constituents.
A corporation is analogous to a marriage, in that you create a new legal entity from a group of individuals who have organized themselves into a new unit. The purpose (unlike a marriage, of course) is to produce and sell a product or service for profit. That is the purpose *of the corporation*, and not the purpose of any of the individuals with in the corporation. (The individuals have their own personal reasons for participating in their individual roles. Their interests are *not* identical with the interests of the corporation as a whole.) It makes conceptual sense to treat what is *in fact* a single unit as *legally* a single unit. The corporation acts, the corporation enters into contracts, the corporation incurs debts, the corporation buys and sells assets, etc. You cannot point to a single individual who is doing any of these things because there *is* no individual doing them. The new unit, the corporation is doing them, in pursuit of its corporate purpose.
This is why it is proper to treat a corporation as a separate legal entity–and what it *means* to treat it that way is that you hold it responsible for its legal actions, whether in the realm of contract, tort, or criminal law. And if the corporation is responsible for these things, then the individual constituents of the corporation are not.
There can be joint liability in some cases, just as there may be joint liability when an individual commits a tort, etc. But this does not mean that you should destroy the corporation’s legal status as a separate entity.
You simply cannot start from the malicious and disturbing premise that CEOs deserve to be punished, simply because they are rich and successful, and then meddle around with legal mechanisms until you discover the meanest way to make him squirm.
Dear Shabana, Before extolling the virtues and value of someone like Kenny Troutt you might want to investigate how he came to amass his fortune. As an “Executive Director” with Excel (back when it meant something) I remember several significant things very clearly. At Excelabration, a yearly event where representatives came from all over the country to listen to the Kenny tell his mama Nadine stories and shout to his cheering, adoring fans that he “WOULD NEVER SELL THIS COMPANY” (which he promptly did 2 years later) and, at an executive event shortly before selling out the millions idiots like me, how Kenny chastised me over a bowl of shrimp, for not “working hard enough”. Excel and Kenny’s direct actions very nearly financially ruined at least 8 families that my wife and I were directly connected with in our Excel business. All were professionals like my wife and I and it has taken years to recover. I also learned through top earners that, according to them, Kenny offered that Excel would pay the top earners (who were not making money anymore through their organizations) to continue to play as if all was completely fine during the last gasps of the business. What kind of a person would seek to perpetuate a lie at the expense of the everyday people who could least afford the ruse. In my opinion, Kenny Troutt is no one to be admired. He, not unlike many others that have come before him, lives in a dream that he made his money honestly. He is simply a sad huckster who made his money off the backs of those who never knew what hit them. I am ashamed to say that I was blind enough to believe and perpetuate his crap to the financial destruction of my family as well as others I influenced to get in. So Kenny raise your horses and support your inner city kids. You’ll get no respect from me, only pity that you were willing to sell your soul to get your wealth.