Wednesday, April 24, 2019

The CEO Pay Machine

In general, CEO pay is out of control and out of line with the value managers provide. I suspect that few people who don't benefit from this system would dispute that. Study after study has shown that CEO performance is not correlated with pay, and that luck plays a far more dominant role in company results than management prowess. And yet, the CEO pay scale has risen to astronomical heights, because company boards, who are supposed to be shareholder representatives, have been captured by company management. Since I already have this point of view, I thought there was little point in reading Steven Clifford's The CEO Pay Machine: How it Trashes America and How to Stop it, but it came so highly recommended that I read it anyway.

I did learn a few things. Clifford starts out by making the case that CEO pay is too high, and how that damages American society.

The number of actual mechanisms by which pay raises are justified by these captive boards is astounding. There is a laundry list of little tricks to steal from shareholders and divert funds to management that Clifford describes.

Clifford has sat on a bunch of boards and audit committees, and so he has seen a number of these tricks employed first hand. He has also never dissented due to the peer pressure of wanting a unanimous vote, despite having reservations.

Sadly, there is probably no solution to this problem without regulation. The current terrible system is too entrenched, and companies with shares that are widely held are not likely to ever be able to influence boards as much as CEOs.



German reader said...

You could read Tyler Cowen'S new book as a counterfactual:

Anonymous said...

I'm dubious that regulation wouldn't be worse than the problem.

I think the ideal situation is when you have a board in which the owners sit on the board and also have an owner/operator mindset. The president or CEO is not on the board and acts as an agent. There is friction at times but it's healthy. We have such a situation at a company of which I'm on the board.

Saj Karsan said...

Hi German,

I think it's important to separate CEO pay with the value that businesses provide society, which I do not dispute.

Hi Brian,

I agree that separating CEO and Chairman roles is important. I also think it's possible that regulations could make things worse. But having no regulations could also make things worse.

German reader said...

Oh, yes, didn't want to imply anything else. But he has a separate discussion about CEO pay and why it is justified very often.

I don't agree completely with him, but he has the talent to bring up the other side of any argument in a balanced way.