CEOs are Paid What They are Worth

October 21st, 2008 | Tags: ,

Response to the Consumerist post on Bank of America CEO Explains How He Beat Wall Street.

CEOs, just like star athletes, are not overpaid–they are paid what the market will bear. If they were not worth what they are being paid, then the company would not hire them. Each company tries to pay the best salaries, to attract the best talent, to out perform the rest of the competitors. They take a risk (large salary) in order to get a reward (stockholder value).

This is capitalism at work.

Update: Apparently this post sparked a bit of a firestorm, hence all my replies listed below. (I would like to say that it was the most replied to post for the day, but that honor goes to bria‘s indignant posting about her lack of knowledge of the definition of the word ‘rape‘. (At least it did until Roz made mincemeat of most of the comments posted.)

@nataku83: “They” referenced the companies taking the risk of paying a large salary–not the CEO accepting it (though CEOs do take on a large risk, for which they are justifiably compensated).

“Joe the Plumber” is a good example of trickle down economics. When we help the small business owner, he grows his business, hires more people for a decent wage so he can expand his business. Are you saying we shouldn’t try to generate new jobs in this country?

@KyleOrton: Would you take a job that required being on the job 24/7, a total dedication to all things corporate, without vacations? What if you also knew that any lapse in judgment (by you or anyone else) would result in your immediate termination (and possible jail time). And, that if you are terminated, then you will likely never be able to work in your field again. How much money would it take for you to accept this job? Would you want to get a guarantee that if something goes wrong, you would have money to live on?

@Snarkysnake: I am sure that Apple would much rather have you than that overpaid Steve Jobs character running the show. It’s not like he’s got the vision for where the corporation is headed–he’s just a cog in a machine (who happens to get a corporate jet to do with as he pleases).

Fraternities will often ask non-members to join, but no one is forced to. Companies are free to hire any independent person that they want to to lead them and pay them whatever they think they are worth. (Unless of course you look at it like a union, where everyone should be paid the same, regardless of ability, and you shouldn’t be able to hire someone unless they are a member of the union.)

@EyeHeartPie: Steve Jobs is the only CEO I know of that sets his salary, and that is $1/year.

@theczardictates: CEOs are hired on the open market, just like you or me. The lack of “correlation between CEO compensation and stockholder value” is the risk that the companies take. Many hope for larger rewards for larger risk.

@zlionsfan: Teams take risks by hiring the players that they want that can help the corporation make a profit. You don’t necessarily have to pay outsize salaries in the NBA to have a team–you just won’t get the best talent. And this is fine for some teams–look at the history of the LA Clippers and how they have chosen to make money as the second best pro basketball team in LA.

@BrianDaBrain: If a company did not feel they were getting a good value, they would hire someone else. It doesn’t get much freer than that.

@Snarkysnake: How is it that Steve Jobs came to own a great deal of Apple shares? (Hint: He wouldn’t own many of them based on your compensation plan outlined above.)

@johnfrombrooklyn: You are correct: the salaries paid to professional baseball players are kept artificially low because of an anti-trust exemption given to MLB. If there were multiple high-level baseball leagues, salaries would go up as the teams competed for the best talent. The teams have benefited by this exemption by not paying the players their true market value.

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