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Sep 29 2009, 11:52 am by Derek Thompson

Why Some CEOs Deserve Their Big Salaries

Today CNN runs a list of the "top five most overpaid CEOs." I sort of hate this. Not because I don't like lists (I did click on it after all) but because I'm pretty exhausted with the overpaid CEO meme. Yes, corporate executives make exorbitant sums of money. But they're also in charge of companies that make exorbitant sums of money, and the difference between a well-run company and poorly run company is worth many times a CEO's salary. But even with that said, this list is weird.

The animating philosophy of CNN's definition of "overpaid" appears to be "your company stock went down in December 2008." But December 2008 was the nadir of the worst recession in decades. Just about every boat sunk in that falling tide. It's a bit like ranking a team's batters based on how they hit during a no-hitter.

But even with that said, why is Comcast CEO Brian Roberts on the list? Comcast's stock fell only 7 percent in 2008. In the second quarter of 2009, Comcast profit climbed 28 percent (up about $130 million) while competitor DirecTV's profit fell $50 million. Brian Roberts makes $40 million a year. Is he overpaid? Maybe not. The most overpaid CEO? Certainly not. If CNN is looking for a Brian Roberts overpaid by $40 million, leave my cable guy alone, and look at the second baseman for the Baltimore Orioles.

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Comments (15)

jmo3

I often think people would be happier and they would make better choices if they knew what went into determining compensation levels. Most people don't really know why some accountants make 40k(working at a non-profit) , some make 60(working for the government), some 120(private practice CPA), some 240(Finance Director) and a accounting firm partner/CFO might make $1 million plus.

If people were aware of the tradeoffs in terms of workload, job security, autonomy, required educational achievement, etc. They might feel more comfortable with where they fit in and the decisions they made.

Anal_yst (Replying to: jmo3)

Amen. That's so spot-on I have nothing more to add, couldn't possible agree with you more. Ok, so I do have something to add:

Most of the people, I think, who are the most incensed by "excessive pay" may not be able to comprehend the determinants of said "excessive" pay. I know friends of mine who make relatively modest incomes who can't possibly comprehend working 80+ hours/weeks and bringing in tens of millions of dollars of revenue for a firm, and being paid accordingly. They can't comprehend the stress of negotiating with Fortune 500 Executives on a deal, the pressure to finish your work before 9am the next day NO MATTER WHAT, etc.

Its different strokes for different folks, but in my experiences, those towards the bottom, financially, just don't get it (while those towards the top tend to have a pretty firm grasp on it, but that's another story).

bf

What you are in fact saying is that those people who complain the most or are most jealous are the least truthful to themselves. They made bad decisions and do not own up to them and then blame others. They get jealous and never admit their choices was what caused them to earn much less than others.

When you confront them on those decisions, they would say something like "I think family is first, health is most important, it is immoral or i think faith is more important" or something to hide the fact that they chose NOT to work hard and are under-achieving as a result. Or even worse, they would then start to make up all sorts of excuses.

John Thacker
If CNN is looking for a Brian Roberts overpaid by $40 million, leave my cable guy alone, and look at the second baseman for the Baltimore Orioles.

Brian Roberts is an underrated player, and possibly the best player on the O's. (OK, yeah, it's the O's) He has 55 doubles this year, which is very impressive for a 31-year old.

Derek Thompson (Replying to: John Thacker)

Oh for a sports blog...

I agree with you. 55 doubles is sort of extraordinary. And BR might be underrated and possibly even the best batter on the O's, but (a) as you note, that's like saying 'the warmest ice cube' and (b) the Os are rebuilding and should go young rather than commit 10 million a year for this guy into his mid 30s.

Nelson Alexander

Myths for Morons.

The CEO in American enjoys the happy mythical status of ancient temple priests responsible for the rain. The assumption of cause and effect in these arguments is perfectly absurd. How does one determine that a certain quantifiable rise in corporate earnings was "caused" by events inside the mysterious mind of the CEO? The CEO tells us, that's how.

As anyone who has worked with megalomaniacal executives knows, it just as likely that earnings resulted from someone's success in talking the CEO out of insane, ill-informed ideas. I would like to see the whole question submitted to a Turing Test. Put a computer, an Ouija Board, and a hired actor in charge of major corporation decisions, then track the results. I would bet anything no "compensation expert" could pick the Ouija Board out of the data.

It we want a country with a strong, stable middle class, it must be created from the top as well as the bottom. Huge pay disparities subvert corporate and national morale, and inflame passions when results do not correspond or when corruption is revealed, as it invariably is. Exorbitant pay also distorts incentives, placing CEOs in an existential skybox with their financial cronies.

Many small company executives cap their own pay at a given multiple of their lowest paid employees. We should make that kind of "decency" the norm rather than juicing the corporate casinos with big pots.

umop ap!sdn (Replying to: Nelson Alexander)

+1.

JakeMcKenzie (Replying to: Nelson Alexander)

I am middle class and I don't understand this naval gazing by the middle class. Derek has a well constructed sound argument, and you come in here talking about rain priests and Ouija Boards! You do not promote a contingent plan towards adequate pay for ceos, you seem to be promoting a space in which no ceos exist at all. This subverted view towards management can only lead to failure and is a contradiction of itself.

Your pet topic is not the artful arrangement of how managerial positions should be run, but a the cornering off of a space in which no managerial power exists at all.

Nelson Alexander (Replying to: JakeMcKenzie)

Precisely! I want to "corner off a space" in the public discussion. Why? Because just as Mr. Thompson is "bored with the overpaid CEO meme" (can't we just shut up and move on?) I am annoyed by the constant presumed axioms and methodological trivialization of major social issues on the part of economics pundits.

National currency is, in some sense, a public utility backed by the taxpayers. (Which should be more obvious than ever.) Overscaled salaries are not an issue the should be automatically exempted from politics. We tend to hand any topic concerning money over to a group of self-appointed specialists, who immediately translate it into their own formulas. How we "calculate appropriate salaries" based on shareholder value.

Well, this is not some universal manner in which people viewed the issue even fifty years ago. It is pure plutocratic ideology masked as "social science." And as a "social science" it does not seem to be working all that well. What you call "navel gazing" I call keeping your eye on the ball. Capitalism does not automatically produce and stabilize middle classes if you just "liberate" the CEOs to "create value." That is childish bunk. A middle class can deteriorate rapidly, as has often happened since the 19th century both here and in Europe. One good indication is rising disparities of wealth and political influence.

Americans have been led to believe by neoclassical economists the the wealthiest 5 percent and the middle 40 percent of the nation all share a single set of policy interests resolve in the "free market." This is ahistorical and delusional. And it is perpetrated by chatter design to rationalize "who is and is not worth $50 million per year." If you could indeed translate all social values into shareholder dollars, a computer could run the country. Unfortunately there are human issues that need attending.

If you really want to find out why CEOs are worth their salaries, read some medieval and Roman history. There is in fact a long historical literature, call it Plutology, devoted to explaining why the rich deserve to be rich. I have nothing against the rich personally, they can be very nice and even productive. But the pseudoscience of their apologist is annoying. The prime social value should be the stability of the middle class, not the science of how rich can we make the rich.

Anal_yst (Replying to: Nelson Alexander)

If you think a CEO is paid too much, buy some stock and agitate for change. If that doesn't work, take your money elsewhere and STFU.

It is the responsibility of shareholders, and the Board of Directors to make sure CEO's are not overpaid, however you choose to decide that. What you're suggesting, to cite one example, is that someone like Steve Jobs, who has effectively taken Apple from zero to superhero, shouldn't be paid accordingly. While surely, there are cases where an ordinary CEO gets paid millions for questionable value-add (if at all), blanket policies are just ridiculous.

This country became great because of social and economic mobility. You haven't really suggested an alternative, at least not that I can identify. The fact of the matter is that virtually anyone (save those with serious mental/psychological disabilities) can become rich in this country if they make they really want to. You don't need to be a MENSA to become a CEO; the same is true of many other professions where the successful members make > say $1 million/year.

I'm curious what you think about those who get paid alot of money by virtually any standard because they make money for their firms. Everyone in sales, every Investment Banker even, every Lawyer and frankly most Doctors get paid alot because they make their firms alot of money. Is there something wrong with paying the Doctor who billed $20million in heart surgeries at his hospital a $2 million salary?

Vera

Derek
you just proved that you don't understand economics.
The price of a good (as the salary of a CEO) should depend on supply and demand, not on value. Your cellphone may enable you to make a 10 Mio. deal. This does not mean that you will pay the cellphone company 9 Mio. You only pay USD 200.- for your cell phone because this is what supply and demand says a cellphone should cost.
Your pizza delivery may save you from starving which may be a USD 200'000.- value for you ( or whatever your wealth is). Still you pay just USD 12.- for your pizza.


Derek Thompson (Replying to: Vera)

I don't think I said (or meant to say) $40 million is exactly what Roberts should receive. How should I know? My point is that it's weird to say a CEO is being overpaid when his last two quarters have trounced the competition. Also what's the "demand" among companies to make $130 million a quarter rather than lose $50 million? And what's the "supply" of CEOs who could do a better job than Roberts? These are questions neither of us have answers to.

fitnessperson10

yeah $40 million, Roberts should receive. My point to say a CEO is just oh nvm.

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adin

The important question that we must address in compensation is not who is "most overpaid" in the United States, but who is underpaid in our country. The current Federal minimum wage is $7.25/hour or about $15,000/yr. This increase effected the 4.5 million minimum wage employees in the U.S. when it took effect on July 24, 2009. The US "Poverty Threshold" in July 2009, was $22,050 for a family of four, and $18,310 for family of three. This excludes "tip workers" who earn $2.13/hour not including tips [so for all you 10% 'tippers' out there, remember the number: 2.13].

Anyone who is reading this on a computer they own isn't earning a minimum wage. How can a family of four survive anywhere in the United States on $15,000/year? It can be done. No car, sub-standard housing, lousy food, poor health care [if any], cold in the winter, hot in the summer, no college, clothes from Goodwill, the Salvation Army, various charities, and on and on.

The minimum wage must be a living wage. If it is not, we have created a permanent group of Americans, estimated to be about 14%, or about 44 million people, living below established poverty levels. Twenty-two million of these people live in "extreme poverty", which is defined as below one-half of the poverty level; of the 22 million in "extreme poverty", about 9 million are children.

The social tension between rich and poor, the middle class and rich, will only worsen until we address this human catastrophe that lies mostly hidden from upper and middle class eyes. When a living wage becomes the norm, then the most highly compensated people in the US will see a downward shift in their obscene wealth. It betrays everything America should stand for to accept this situation.

"The official poverty line today is essentially what it takes in today's dollars, adjusted for inflation, to purchase the same poverty-line level of living that was appropriate to a half century ago, in 1955, for that year furnished the basic data for the formula for the very first poverty measure. Updated thereafter only for inflation, the poverty line lost all connection over time with current consumption patterns of the average family. Quite a few families then didn't have their own private telephone, or a car, or even a mixer in their kitchen... The official poverty line has thus been allowed to fall substantially below a socially decent minimum, even though its intention was to measure such a minimum."
John Schwarzt, University of Arizona

Anal_yst (Replying to: adin)

Why the hell would you try to support a family of 4 if you make minimum wage? That's just a ridiculous proposition. I know a few people who've had a few "plan B" incidents in their life and in that regard came close to having a kid when they couldn't support one, but there are people who raise kids when they very clearly lack the means with which to do so.

Why should anyone have to subsidize such people's poor decisions?