The Highest-Paid CEOs Are The Worst Performers, New Study Says

[Bronzeage]

I have seen that raising minimum wage causes unemployment. But I have never seen that higher wages paid voluntarily would cause unemployment, which is what you are saying if you think that high CEO pay should cause unemployment among CEOs.

You mean the Econ 101 Law of Supply and Demand that gets thrown around an awful lot doesn't apply to the CEO labor market?

Yeah. It's like saying if Rod Stewart got paid less for a concert, there would be more Rod Stewart concerts, and nobody wants that.

 

[ksen]

good god, no!

 

[ksen]

I have seen that raising minimum wage causes unemployment. But I have never seen that higher wages paid voluntarily would cause unemployment, which is what you are saying if you think that high CEO pay should cause unemployment among CEOs.

There is a scene in John Le Carre's Tinker Tailor Soldier Spy, where Toby asks George if he's ever bought an altered photograph. He tells George, "The more you pay for it, the more you want to believe it's real."

CEO payment operates outside ordinary economic principles and inside the specialized principles of "exploitation"(the technical economic definition of the word). The board of directors, which sets the CEO's pay, wants to believe they have the right person. The more they pay, the more they want to believe it, even to the point of believing poor performance was in the face of catastrophic conditions and anyone else would have done much worse.

I think in poker they call this: "pot committed."

 

[Bronzeage]

There is a scene in John Le Carre's Tinker Tailor Soldier Spy, where Toby asks George if he's ever bought an altered photograph. He tells George, "The more you pay for it, the more you want to believe it's real."

CEO payment operates outside ordinary economic principles and inside the specialized principles of "exploitation"(the technical economic definition of the word). The board of directors, which sets the CEO's pay, wants to believe they have the right person. The more they pay, the more they want to believe it, even to the point of believing poor performance was in the face of catastrophic conditions and anyone else would have done much worse.

I think in poker they call this: "pot committed."

The "could have been worse" compensation package is part of of the "we want a CEO who is willing to take risks" culture. This is where the golden parachute was invented. The CEO of a lot of really big companies can fail on a grand scale and walk away with millions of dollars, while stockholders have to cut back on pool maintenance. If CEO's were paid in stock options that mature five years in the future, corporate management would take on a very different face.

 

[SimpleDon]

Econ 101 says that raising wages always results in disemployment because producers hire workers until the wage paid is equal to the marginal cost of the last item produced. Therefore any increase in wages has to cause unemployment because the increased wage has to be greater than the marginal product costs.

There is no exception in marginal productivity theory for voluntary wage increases. At least that I have seen.

It is not supply and demand that causes unemployment when wages go up in neoclassical economics, it is marginal productivity.

If you don't accept the marginal productivity explanation, then it would be stupid to lay off people when wages go up. If you lay off people not only will you lose profits because of the increased wages, you will lose the profits you would have made on the products produced by the laid off workers.

Let's think through how marginal productivity applies to salary increases for executives like the CEO. Their salaries are usually charged off as overhead, fixed costs like rent. If the price that they get for the product is not elastic the increase in the CEO's salary would increase costs and decrease profits just like an increase in the workers' wages. So yes, it would result in having to lay off workers. The workers whose wages exceed the marginal product costs inflated by the increase in executive pay. Not the executives, of course, the workers.

 

[coloradoatheist]

Econ 101 says that raising wages always results in disemployment because producers hire workers until the wage paid is equal to the marginal cost of the last item produced. Therefore any increase in wages has to cause unemployment because the increased wage has to be greater than the marginal product costs.

There is no exception in marginal productivity theory for voluntary wage increases. At least that I have seen.

It is not supply and demand that causes unemployment when wages go up in neoclassical economics, it is marginal productivity.

If you don't accept the marginal productivity explanation, then it would be stupid to lay off people when wages go up. If you lay off people not only will you lose profits because of the increased wages, you will lose the profits you would have made on the products produced by the laid off workers.

Let's think through how marginal productivity applies to salary increases for executives like the CEO. Their salaries are usually charged off as overhead, fixed costs like rent. If the price that they get for the product is not elastic the increase in the CEO's salary would increase costs and decrease profits just like an increase in the workers' wages. So yes, it would result in having to lay off workers. The workers whose wages exceed the marginal product costs inflated by the increase in executive pay. Not the executives, of course, the workers.

One other difference is that a large chunk of executive compensation comes from stock grants which is a different type of compensation bucket then ordinary cash that makes up most of workers compensation.

And Bronzeage had a good remark and one that maybe the original author did look at but wasn't addressed in the short article. Was CEO pay actually looked at when it was exercised, not when it's granted.

 

[barbos]

Poorly performing companies usually have desperate boards which think hiring expensive CEO could help, but it does not most of the time.

 

[Jayjay]

I have seen that raising minimum wage causes unemployment. But I have never seen that higher wages paid voluntarily would cause unemployment, which is what you are saying if you think that high CEO pay should cause unemployment among CEOs.

You mean the Econ 101 Law of Supply and Demand that gets thrown around an awful lot doesn't apply to the CEO labor market?

If it does, that would imply that the supply of CEOs has not increased as much as the demand. Why do you think that should cause unemployment? If anything, it's the opposite.

 

[SimpleDon]

Econ 101 says that raising wages always results in disemployment because producers hire workers until the wage paid is equal to the marginal cost of the last item produced. Therefore any increase in wages has to cause unemployment because the increased wage has to be greater than the marginal product costs.

There is no exception in marginal productivity theory for voluntary wage increases. At least that I have seen.

It is not supply and demand that causes unemployment when wages go up in neoclassical economics, it is marginal productivity.

If you don't accept the marginal productivity explanation, then it would be stupid to lay off people when wages go up. If you lay off people not only will you lose profits because of the increased wages, you will lose the profits you would have made on the products produced by the laid off workers.

Let's think through how marginal productivity applies to salary increases for executives like the CEO. Their salaries are usually charged off as overhead, fixed costs like rent. If the price that they get for the product is not elastic the increase in the CEO's salary would increase costs and decrease profits just like an increase in the workers' wages. So yes, it would result in having to lay off workers. The workers whose wages exceed the marginal product costs inflated by the increase in executive pay. Not the executives, of course, the workers.

One other difference is that a large chunk of executive compensation comes from stock grants which is a different type of compensation bucket then ordinary cash that makes up most of workers compensation.

And Bronzeage had a good remark and one that maybe the original author did look at but wasn't addressed in the short article. Was CEO pay actually looked at when it was exercised, not when it's granted.

So what you are saying is that only the increases in salaries of CEOs forces lay offs of workers according to marginal productivity in neoclassical free market economics.

That when the CEOs only erode the companies' capitalization and shareholder value by putting previously held shares into the market that it is a free ride and no one is actually hurt by it?

I will have to think about that for awhile. Maybe you could do the same. n I am not sure that I understand Bronze age's remark about the difference between exercised and granted. And I think that he is talking about stock options and not the outright grants you mentioned. Which I never ran across but there might be companies that do them.

But there are stock options that are granted but never exercised. The stock price may have dropped below the option prices. Most stock options require you to be still employed by the company when the option can be exercised.

 

[SimpleDon]

You mean the Econ 101 Law of Supply and Demand that gets thrown around an awful lot doesn't apply to the CEO labor market?

If it does, that would imply that the supply of CEOs has not increased as much as the demand. Why do you think that should cause unemployment? If anything, it's the opposite.

Once again, I have to point out that is not supply and demand that forces companies to lay off workers when wages go up in Econ 101, good old neoclassical, mainstream, free market economics. It is marginal productivity that does. I explained it in another post to this thread since apparently no one here is really up on their Econ 101, etc.

As I said in that post if you don't accept marginal productivity setting prices it means two things. One that you don't have to lay off workers when wages go up. And two, you have destroyed the primary theoretical support for the idea that a self-regulating free market can exist. Since there is no empirical evidence that one could ever exist you have destroyed about 90% of the theories in Econ 101, neoclassical economics.

 

[Bronzeage]

So what you are saying is that only the increases in salaries of CEOs forces lay offs of workers according to marginal productivity in neoclassical free market economics.

That when the CEOs only erode the companies' capitalization and shareholder value by putting previously held shares into the market that it is a free ride and no one is actually hurt by it?

I will have to think about that for awhile. Maybe you could do the same. n I am not sure that I understand Bronze age's remark about the difference between exercised and granted. And I think that he is talking about stock options and not the outright grants you mentioned. Which I never ran across but there might be companies that do them.

But there are stock options that are granted but never exercised. The stock price may have dropped below the option prices. Most stock options require you to be still employed by the company when the option can be exercised.

A stock option is a contract to buy stock tomorrow, at today's price. These shares can then be sold on the market, but when it is part of a CEO's pay, the shares often are bought back by the company. This keeps the stock price stable, but does affect the companies "cash on hand" account.

The question is how far in the future should the option be placed. There are a lot of business strategies which will cause a short term rise in share prices. Most of these involve cutting expenses, things like plant closures and layoffs, usually called downsizing. Sustained long term growth is more difficult.

 

[SimpleDon]

So what you are saying is that only the increases in salaries of CEOs forces lay offs of workers according to marginal productivity in neoclassical free market economics.

That when the CEOs only erode the companies' capitalization and shareholder value by putting previously held shares into the market that it is a free ride and no one is actually hurt by it?

I will have to think about that for awhile. Maybe you could do the same. n I am not sure that I understand Bronze age's remark about the difference between exercised and granted. And I think that he is talking about stock options and not the outright grants you mentioned. Which I never ran across but there might be companies that do them.

But there are stock options that are granted but never exercised. The stock price may have dropped below the option prices. Most stock options require you to be still employed by the company when the option can be exercised.

A stock option is a contract to buy stock tomorrow, at today's price. These shares can then be sold on the market, but when it is part of a CEO's pay, the shares often are bought back by the company. This keeps the stock price stable, but does affect the companies "cash on hand" account.

The question is how far in the future should the option be placed. There are a lot of business strategies which will cause a short term rise in share prices. Most of these involve cutting expenses, things like plant closures and layoffs, usually called downsizing. Sustained long term growth is more difficult.

I understand stock options. But exercising an option and selling the stock back to the company to prevent the dilution of shareholder value seems to be a round about way of paying a cash bonus if the stock goes up. Except if the stock option stock gain can be written off as capital gains instead of income. With the tax savings of course. I didn't phrase that well but you understand. The stock option company buy back scheme is to avoid taxes.

 

[Bronzeage]

A stock option is a contract to buy stock tomorrow, at today's price. These shares can then be sold on the market, but when it is part of a CEO's pay, the shares often are bought back by the company. This keeps the stock price stable, but does affect the companies "cash on hand" account.

The question is how far in the future should the option be placed. There are a lot of business strategies which will cause a short term rise in share prices. Most of these involve cutting expenses, things like plant closures and layoffs, usually called downsizing. Sustained long term growth is more difficult.

I understand stock options. But exercising an option and selling the stock back to the company to prevent the dilution of shareholder value seems to be a round about way of paying a cash bonus if the stock goes up. Except if the stock option stock gain can be written off as capital gains instead of income. With the tax savings of course. I didn't phrase that well but you understand. The stock option company buy back scheme is to avoid taxes.

Yes, that is the way it works. When the capital gains tax was cut, CEO stock option plans became much more generous.

 

[coloradoatheist]

A stock option is a contract to buy stock tomorrow, at today's price. These shares can then be sold on the market, but when it is part of a CEO's pay, the shares often are bought back by the company. This keeps the stock price stable, but does affect the companies "cash on hand" account.

The question is how far in the future should the option be placed. There are a lot of business strategies which will cause a short term rise in share prices. Most of these involve cutting expenses, things like plant closures and layoffs, usually called downsizing. Sustained long term growth is more difficult.

I understand stock options. But exercising an option and selling the stock back to the company to prevent the dilution of shareholder value seems to be a round about way of paying a cash bonus if the stock goes up. Except if the stock option stock gain can be written off as capital gains instead of income. With the tax savings of course. I didn't phrase that well but you understand. The stock option company buy back scheme is to avoid taxes.

i am curious to look at the tax changes in what the company pays toward each. If anything, I think they are worse off with paying it with the stock buy back.

 

[coloradoatheist]

Yes, that is the way it works. When the capital gains tax was cut, CEO stock option plans became much more generous.

CEOs liked it definitely. Also a rule was put in by Clinton that penalized companies from paying too much cash so they switched to stock.

 

[Bronzeage]

I understand stock options. But exercising an option and selling the stock back to the company to prevent the dilution of shareholder value seems to be a round about way of paying a cash bonus if the stock goes up. Except if the stock option stock gain can be written off as capital gains instead of income. With the tax savings of course. I didn't phrase that well but you understand. The stock option company buy back scheme is to avoid taxes.

i am curious to look at the tax changes in what the company pays toward each. If anything, I think they are worse off with paying it with the stock buy back.

The idea is to pay the CEO in the lowest possible tax bracket, not pay him the least possible.

 

[coloradoatheist]

i am curious to look at the tax changes in what the company pays toward each. If anything, I think they are worse off with paying it with the stock buy back.

The idea is to pay the CEO in the lowest possible tax bracket, not pay him the least possible.

They want to do several things with pay. They have to find the balance of paying the least and paying for performance. Stock options were a way to try and align CEO pay with company performance.

 

[SimpleDon]

I understand stock options. But exercising an option and selling the stock back to the company to prevent the dilution of shareholder value seems to be a round about way of paying a cash bonus if the stock goes up. Except if the stock option stock gain can be written off as capital gains instead of income. With the tax savings of course. I didn't phrase that well but you understand. The stock option company buy back scheme is to avoid taxes.

i am curious to look at the tax changes in what the company pays toward each. If anything, I think they are worse off with paying it with the stock buy back.

I don't have a feeling for the company's tax but it is much better for the executives, paying a 15% capital gains tax instead of a what 38% marginal income tax rate.

 

[Bronzeage]

The idea is to pay the CEO in the lowest possible tax bracket, not pay him the least possible.

They want to do several things with pay. They have to find the balance of paying the least and paying for performance. Stock options were a way to try and align CEO pay with company performance.

In this particular example, we are talking about a scheme to maximize the CEO's paycheck through a scam which substitutes stock for cash payments. We left off the part about the stock "buy price" being set below market value, insuring a profit. This is not about optimizing the CEO's incentives to not run the company bankrupt.

 

[coloradoatheist]

They want to do several things with pay. They have to find the balance of paying the least and paying for performance. Stock options were a way to try and align CEO pay with company performance.

In this particular example, we are talking about a scheme to maximize the CEO's paycheck through a scam which substitutes stock for cash payments. We left off the part about the stock "buy price" being set below market value, insuring a profit. This is not about optimizing the CEO's incentives to not run the company bankrupt.

i'm not sure I'm following. CEO pay is maximized if the stock prize goes up. Where in a period of time that the options can be exercised is the issue.