MONEY

Kevin Drum and Gregg Easterbrook think CEOs are overpaid. NYSE chairman Richard Grasso is the target. Easterbrook:

Bear in mind that like all grotesque CEO overpayments, Grasso’s money is not popping out of the air–it is popping out of your pocket. Corporations pay a fee to have their stocks listed on the NYSE. That fee reduces the amount they could otherwise issue as dividends to stockholders or declare as profits that would raise stock prices; this in turn reduces your mutual-fund and retirement income so that Dick Grasso can wallow. A check for $140 million handed to a man for sitting in a government-protected leather chair, who will now cackle as he counts his gold and millions of Americans–one in eight live in poverty–go to bed crying in anxiety over small sums.

Not to mention all those starving kids in India, for whose sake we should all clean our plates. Easterbrook’s a bright (Brookings) fellow. Surely, he doesn’t think that, if we cut Grasso’s pay, it would somehow be transferred to the needy? Or that, if we replaced Grasso’s chair with a crappy one, it would staunch the flow of tears from the sobbing masses?

Kevin adds,

When are shareholders finally going to figure out that executive compensation in America is no longer just a few people making a little bit more than they should, and therefore not something that really affects the bottom line? The truth is that in most large companies today executive compensation is fantastically higher than it should be, and the overpayments are a serious drag on corporate profits. Reduce the pay of the top 5% of executives at Fortune 500 companies by 50%, and corporate earnings would improve measurably with no loss in the work habits of the top officers.

After all, does anyone seriously think that Grasso would have worked only half as hard if he’d been paid a mere $70 millon? The question answers itself.

I guess the question is whether, if his salary were a mere $70 million, someone else would lure him away. I personally haven’t a clue. Presumably, the NYSE board is betting they would.

I don’t quite get it, either. Still, presumably the market says these guys are worth this much money.

Katie Couric makes $13 million a year, and all she has to do is look cute and get up early. You’d think someone could be found with that skill set for, say, $40,000. But somebody thinks the value on keeping Couric, rather than allowing her to go to a competing network, is worth $13 mil.

Ditto athletes, movie stars, and corporate execs. One would think that Coca-Cola could pretty much run itself at this point; but somebody thinks the CEO adds millions to the bottom line. It’s quite possible that they’re wrong, I guess.

FILED UNDER: Economics and Business
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Paul says:

    Kevin Drum and Gregg Easterbrook think CEOs are overpaid.

    Of course they do.

    It never ceases to amaze me that to liberals when the stockmarket goes up it is just a bunch of fat cats making money off the poor. When it goes down it represents the retirement accounts of all the poor people shafted by the rich.

    I wish I could think like that.. It must be so pleasant to have it both ways.

  2. Bryan says:

    I think executive pay should have some sort of relation to the pay of regular employees. As it is, it’s serfs and lords at most of these companies.

    And anyone who says $70 million plus another $100 million or so in stock options is not obscene is disconnected from reality. That includes Katy Couric and LeBron James. I would honestly be embarrassed to be *paid* that much for what Couric and James do.

  3. Kevin Drum says:

    Methinks you’re showing too much faith in the free market, James. As you know, there are a few other factors at work too.

    Paul: What stockmarket? Grasso’s pay was in cash. No risk required, no entrepeneurship, no nothing.

    I don’t have a problem with Bill Gates’ stock holdings. I *do* have a problem with the fact that wildly excessive CEO pay is ripping off shareholders, both big and small alike.

  4. Paul says:

    Kevin: That fee reduces the amount they could otherwise issue as dividends to stockholders or declare as profits that would raise stock prices; this in turn reduces your mutual-fund and retirement income

    I was not commenting on his level of pay with that as much as I was noticing a trend.

    As far as commenting on his income I could fisk the article(s) for days. Somehow the people that complain about exec pay never take skill sets into account. How much was Lee Iacocca worth? Not only did do what others coud not but he saved thousands (if not arguably) million of jobs.

    If you had Grasso’s skills you would be paid accordingly.

    Brian: I think executive pay should have some sort of relation to the pay of regular employees. As it is, it’s serfs and lords at most of these companies.

    Ya know you might research Ben & Jerry’s experience with this. When they went national they realized they no longer had the skills to run the company. So the two Vermont liberals set out to search for a new CEO and they made a rule like the one you propose.

    The problem was nobody with the skills to be CEO of that size company would work for that wage. So B&J kept running the place and damn near ran it out of business.

    Finally greed (as the liberals call it) won out over the good of the working man and they hired a CEO who made them boat loads of money.

    Of course with your methond, all those people working for them would be unemployed.

    Which was the better choice?

    Paul

    The problem with socialism is that it does not work.

  5. I think they are paid so high because of risk, not skill. There are plenty of people out there who could handle the job, but many of them have never been given a chance. If you have billions in revenues and are losing market share, are you going to give someone a chance, or hire away a successful CEO from another company? Most would reduce risk by hiring a previously successful CEO, but that comes with a hefty price tag.

    What pisses me off as a shareholder is that so many CEOs are worthless and still make a ton and the board lets them get away with it. When I get to sit on a corporate board someday (and I do hope I achieve such a goal), a crappy CEO won’t given anything but a pink slip.

  6. melvin toast says:

    The crux of the problem is the corporations are not valued according to profit, i.e. the dividends that they pay. Dividends are profits. If you’re looking for a good stock, why aren’t you concerned with profits?

    Because dividends are taxed twice. Corporations keep the money and spend it on fancy offices, employee bonuses and infrastructure expansion. How do they do this and not have the stockholders fire the board?

    Because corporations are priced according to growth potential. And a company that is spending a lot of money, or even better, borrowing a lot of money to expand it’s business has growth potential. Instead of dividends the stock price goes up, the holders are happy.

    Thus corporations are less driven by profit and more driven by developing a perception of growth potential. Eliminating taxes on dividends at the corporate end would allow corporations to “cheaply” share profits with stock holders. And if stock holders focus on profits, they’ll complain to the board if they think the executives are getting too much money.

  7. bryan says:

    It’s hard to argue with someone who can’t even get your name right.

    B&J couldn’t get anyone from the pool of current CEOs. Perhaps if they’d thought beyond the boundaries of the inbred pool of applicants, they could have found someone to do so.

    You make it sound like every successful company is the direct result of the CEO who heads the ship. That’s crap. Coca Cola would be successful if *I* were the CEO.

    Besides, just because it’s the going rate doesn’t make it right. And you can’t dispute the fact that $70 million plus incentives is an obscene amount of money.

  8. Paul says:

    It’s hard to argue with someone who can’t even get your name right.

    […]

    Coca Cola would be successful if *I* were the CEO.

    It is hard to argue with someone with an ego that size.

    You would have no freaking clue. Nor would I.

    Get over yourself. If you knew half of what those guys know, you would be paid better then you are today. Read Businesspundit’s post.

    You see, it is self defineing. If you had any clue how to run a company that size, you would understand the dynamics that push the prices that high.

    Remember, the system you bash has made the richest “poor” people in the world.

    The system you advocate has failed repreatedly.

    How much more proof do you need?

    Paul

  9. whatever says:

    Wow, this is really strange. Drumm, whom I have been diametrically opposed to on everything under the sun, is reading my mind:

    “I don’t have a problem with Bill Gates’ stock holdings. I *do* have a problem with the fact that wildly excessive CEO pay is ripping off shareholders, both big and small alike.”

    And Paul is trying to link executive pay to capitalism – it isn’t – if anything it’s an agency problem.

    We are talking about the difference betweem an entrepreneur and a paid manager. The former should enjoy the fruits of his labor. Gates has billions. Good for him. The latter should be compensated to the best of his talent with an incentive that reflects what he has done for those who put their capital at risk, the shareholders. *MOST* CEO’s are compensated fairly. But a few of them, like this example, are breathtaking in their greed and disconnect from talent and what they have done for the stockholders. Also note in today’s WSJ that it is coming out that Grasso had input into his pay level. Not exactly “capitalism” if this turns out to be the case (i.e. no open market to find an equally talented manager who would do the job for less).

    And Paul, don’t go around defending CEOs.
    I have met and worked closely with CEOs of several public companies. Several had no idea how to do email or powerpoint, got most of their ideas from staffers and got where they were not because they knew how to run a company, marketing campaign or create new products – they got where they were through politics. I have seen one CEO who had no business being IN business, but his wife was well connected to one of the key board members…well, you know hot it goes. Not exactly a shining example of capitalism.

    The worst is that these few bad apples give “business” a bad name, allowing those who would demonize capitalism to have another arrow in their quiver.

  10. James Joyner says:

    Now, why exactly is it a problem if the CEO can’t do menial secretarial tasks?

    And I suspect the number of CEOs making the kind of money we’re talking about who got there with no business acumen but rather through family connections is rather small.

  11. bryan says:

    Paula (did I spell that right? – sarcasm),

    Get over yerself

    You get over yerself. How do you know what I make? How do you know what I do? How do you know I *wouldn’t* know what to do?

    You still can’t answer the charge. $70 million for a CEO is obscene.

    Consider this: The CEO of the UNITED STATES OF AMERICA gets paid $200,000 a year!

    James Joyner – to use our host as an example – knows quite a bit (as evinced by his posts), and yet he isn’t paid nearly that much.

    You see, it is self defineing. If you had any clue how to run a company that size, you would understand the dynamics that push the prices that high.

    I understand the dynamic that pushes prices that high: unbridled greed and stupidity combined. That doesn’t mean that I have to agree with it.

    BTW, the system I advocate doesn’t exist. I haven’t defined *what* system I advocate, other than that employee salaries should be somehow linked together. It’s obscene for a CEO to get a $70 million paycheck while low-balling the very workers who make it possible for him (and the stockholders) to jump tax brackets.

  12. James Joyner says:

    I can corroborate that, in fact, I make significantly less than $70 mil.

  13. Paul says:

    ?What ever:

    The latter should be compensated to the best of his talent with an incentive that reflects what he has done for those who put their capital at risk, the shareholders.

    NEWSFLASH: They are paid accordingly! Who the hell do you thinks sets their pay if not the shareholders? Geeze!

    And Paul, don’t go around defending CEOs.

    Um excuse me…. I go around defending who the “F” I want! Tell ya what… Don’t go around trying to use your brain… It will only prove embarrassing!

    Breanne (did I spell that right?)

    How do you know what I make?

    I sure as hell know you don’t made half of what Grasso makes! How do I know that???? Your comments are those of a loser in life.

    Or are you secretly a CEO making 35 mill a year and spending your time yacking on the internet. SPARE ME! You don’t have a freaking clue how to do the man’s job. Nor are you paid accordingly.

    Consider this: The CEO of the UNITED STATES OF AMERICA gets paid $200,000 a year!

    And what exactly is this meanningless point suppose to prove? What a loser!

    James Joyner – to use our host as an example – knows quite a bit (as evinced by his posts), and yet he isn’t paid nearly that much.

    And If James knew how to do Grasso’s job he would be paid even more.

    LEMME EXPLAIN IT TO YOU….

    K_N_O_W_L_E_D_G_E is WORTHLESS is the business world. SKILL is what people pay for. James can be the next freaking Albert Einstein but if he can’t freaking buckle his shoe, how much can he make?

    When I refer to what a CEO knows I means what he knows how to DO.

    Must I explain the most basic of business principles to you????

    In the REAL world Breanna, people get paid for what they DO. Obviously you have not the skill sets of Mr. Grasso, so how are you even CLOSE to qualified telling me how much that skill set is worth???

    Come back when you have any clue how life works. Quit whining like a hopeless child that some other guy in life got more than you. I know 3 year olds that don’t whine as much as you guys. (Teeeacher Mr. Grasso gets paid more than meeee.)

    If you want to be paid 70 million bucks learn what he knows (how to do) and then you will.

    In the mean time, learn a freaking skill.

    Paul