Are CEO\'s Paid Too Much?

¶ … CEOs Paid Too Much?

There has been much press of late suggesting that corporate CEO's are generally overpaid. This 'talk' often generates controversy and has resulted in much analysis of corporate compensation programs in recent years. There is a strong and growing group of representatives that claim that CEOs are overpaid. The overwhelming body of evidence however, suggests that by and large a majority of CEOs are paid or compensated very well because they produce extraordinary results for the corporations they work in.

In this review the researcher will examine both sides of the issue, countering claims that CEOs are overpaid and providing evidence of why most CEOs are paid as well as they have been for so many years. The author takes the stand that CEOs are not overpaid given the contributions they make to organization's bottom line and overall performance.

Executive Pay -- Paying Leaders for Performance

There is much evidence suggesting that some CEOs are overpaid. Much of this evidence however is narrow sited and does not take into consideration the history of executive pay and contributions to society. In her article "Lowering the Bar" Joann Lublin suggests that CEOs are overpaid and under performing in many cases. The author uses as example Chief Executive Craig Crisman of Applied Magnetic Corp. During Crismans' reign stock prices and share prices in the company sank to new lows. Fortunately the CEO was able to revive many worthless stock options.

Despite often 'shaky' performances the author suggests that many companies are reprising worthless options and besting large offerings and "lower the bar on executive pay" to ensure business leaders stay put in a market that is often considered "hotter than ever" (Lublin 1).

There is ample evidence supporting Lublin's claim that CEOs are paid extraordinary sums of money. During the late 1990s many CEOs realized an average increase of 5.2% in salaries and in bonuses compared with an average 5.0% average increase in profits among corporations (Lublin 1). This suggests that corporations are overcompensating CEOS whether or not their performance matches. A Mercer analysis referenced in 1999 suggested that the median salary for executives at that time totaled $1,569,84 (Lublin 1). Most executives are realizing perks however in the area of option exercises rather than actual salary (Lublin 1). Many are exercising options and taking advantage of significant gains. Case in point? The author points to Michael Eisner, CEO of Walt Disney Co., who profited more than 500 million dollars after exercising his options and acquiring millions of shares (Lublin 1). The author suggests that rather than adopt actual pay for performance incentives, most companies are 'forgiving and forgetting' (Lublin 1).

What Lublin fails to recognize is the majority of CEOs that are 'overpaid' are actually performing quiet well, and in many cases providing the company's they work for with billions of dollars in profits. In his article "Are CEOs Overpaid" Williams also examines corporate compensation. The author notes that in the wake of scandals including Enron and the WorldCom scandals, more and more researchers are preaching about how overly compensated CEO's are. The author however suggests that scandals among corporate executives are in fact, rare, and that the reputation of CEOs should not be "tarnished' based on the "misdeeds" of a few misguided representatives.

Williams goes on to assess whether CEOs are worth the millions they are often paid by corporations. He uses Jack Welch, General Electric's CEO who succeeded in improving company worth from $14 billion to $500 billion. He goes on to suggest that in many cases, CEOs may in fact be under compensated for the tremendous value they offer organizations. He goes on to cite Jim Kilts, who took over as CEO for Gillette. He notes that prior to Kilt taking the reigns the company lost nearly half its value with marketing and sales shares plummeting. After Kilts was in office however the company's market value increased by $11.3 billion, more than a 34% increase as the author points out.

Many who believe in some cases that CEOs aren't paid enough for what they do echo this sentiment. The solution to the problem may be a true pay for performance system, where CEOs salaries are based more on their achievements and contributions to the corporation than on other factors. In a highly competitive market corporations do have to work diligently to find reputable and worthwhile executives to lead their teams. In his article "Steve Jobs Lets Us Think Different About CEO Pay" Crystal suggests that CEOs may be overpaid if pay is not associated with direct performance. Crystal refers to the co-founder of Apple Computer, who was fired from Apple only to be hired by Next Software and then Pixar. The main point the author makes is that to be compensated as highly as CEOs inevitably are, they should be performing at top-notch levels. It is important to note that Jobs did go on to help Apple corporations reach thousands of dollars in profits. At least, that is how Jobs would argue his case. The CEO often suggests that a company is performing well based on their contribution to the bottom line, their strategy or 'genius' if you will (Crystal, 1999).

Most corporations support paying CEOs what they are worth. Companies tend to believe that offering CEOs company shares is motivational, suggesting that CEOs who are compensated appropriately and fairly will perform well (Crystal, 1999). This line of thinking suggests that CEOs need to be compensated well in order to perform well, rather than for performing well.

Jobs is perhaps the exception to the rule as the author of this article points out. He started at Apple, moved to others companies, one of which he sold back to Apple and reinstated himself as the top executive, after which working for zero compensation he went on to help the company realize significant or "eye-popping" as the author describes gains of more than 102.8% per year (in referenced to compound total shareholder returns)(Crystal, 1999). Further he boosted Apple to the point where the company is now considered among the top 3% of companies in the S& P. 500 Index group. This is the kind of performance that should be rewarded, and is often rewarded justly so.