Corporations and their CEOs

[Geronimo]

Why do corporations always seem to pay their CEOs lavishly no matter how badly the company performs even when the CEOs make incompetant decisions?

Several CEOs were directly to blame for various bonehead blunders seen in Cronos_qc's thread regarding CNNs list of 101 dumbest moments in business.

Nonetheless Corporations usually lavish huge severance bonuses equivalent to the years salaries of thousands of employees to these boneheads when they leave.

We see that stockholders are generally thrilled if mere hundreds of employees are laid off even though it will cost the company hard won gains in experience and yet the same logic doesn't seem to allow them to play the same sort of hardball with their CEOs even though it is clear that CEO compensation exceeds that of thousands of other employees!

I've always assumed that the bottom line is the only real goal of any corporation so how in the hell does this double standard serve the bottom line?

[Asher]

Monetary compensation that is in obscene amounts for CEO is indeed obscene. Give it to the employees, shareholders, or re-invest it in the business.

[Zkribbler]

The reason is this: The Board sets the CEO's rate of compensation. The more it is, the more the Board can justify their own high salaries. Plus, one of them might get to be CEO on day, and so they all what high salaries already in place.

[Pekka]

It's interesting, in here, the salaries are way behind with our CEOs. BUT, they have absolutely no responsibility over the results. It really is a bad thing, because the decision makers can really make a big difference.. they say that good decision makers can go for .. 70% or 80% success rate with decisions(?), so that salary is IMO then justified. However, if they do not perform, well.. what's this guy doing here?

For some contrast, in Japan, to my understanding, the managers are responsible of their employees. That is, an employee is supposed to do their best, and in return their manager is looking out for them for the long haul. It's not unheard, that you can get a life time career in one company, it can be even something they want you to do. I think it's more balanced, then again, the managers have a faster rotation there, screw up big, and you should step down, so that your business partners can keep working with you. In here, it doesn't matter. If I was a business partner for a screw up CEO, I'd want them to get out. Why would you ever want to keep spending big bucks on a loser, when you could have a winner? THat's just bad investing.

So the salary is justified only if the record shows you are a winner, and able to make decisions that generates all that extra income. But that's the old way anyway, I think it makes more sense to give some goods to the folks in other positions as well. Spread the juice a little, give them options or something. If the stock goes up, everyone gets the benefits of that. Seems like a better deal to me. Why would we boost one guy, when we could boost a bunch of people, who in return will be more competitive?

[Geronimo]

Originally posted by Zkribbler
The reason is this: The Board sets the CEO's rate of compensation. The more it is, the more the Board can justify their own high salaries. Plus, one of them might get to be CEO on day, and so they all what high salaries already in place.

This is clearly detrimental to the interests of the stockholders and to the interests of the corporation as a single entity.

Can anything be done to fix this? changes to corporate laws for instance? If a legal change could help why have things gotten so bad when we are in an age of international corporations which presumably would find themselves forced to operate in at least one major market where corporate laws would already be tailored to make this sort of thing unlikely.

Is it perhaps simply impossible to write corporate laws that will make corporations behave for their stockholders benefit?

[Spiffor]

IMO, one of the main reasons is because those who decide of the CEO's severance package see him as a fellow (i.e, his being fired is concrete to their minds), whereas laid-off employees are an adjustment variable.

You tend to be much more generous toward someone you can feel empathy for. And the meaning of "generosity" is completely different when your budget is counted in billions.

[Cort Haus]

Massive reward for massive failure at the highest level is one of life's great obscenities.

[One_more_turn]

There are a few exceptions though:

Apple's Steve Jobs has an annual salary of 0, and he has yet to sell any of his restricted stocks. When he took over Apple in 1997, Michael Dell spotted that he should liquidate the company, now Apple's market cap is almost a third higher than Dell's.

Warren Buffett's salary is 100K a year. He hasn't sold a single share of Berkshire Hathaway so far.

[Geronimo]

Originally posted by One_more_turn
There are a few exceptions though:

Apple's Steve Jobs has an annual salary of 0, and he has yet to sell any of his restricted stocks. When he took over Apple in 1997, Michael Dell spotted that he should liquidate the company, now Apple's market cap is almost a third higher than Dell's.

Warren Buffett's salary is 100K a year. He hasn't sold a single share of Berkshire Hathaway so far.

a big problem seems to be the stock holders reward such behavior far less generously than they reward the stock of a company that announces a massive lay-off.

Maybe the stockholders have some reason to believe that huge savings of money at the top are less profitable than smaller savings resulting from laying employees off?

[pchang]

When companies lay off employees, they are not replaced. There is real cost savings.
When companies get rid of CEOs, they replace them with equally expensive (or even more expensive) CEOs. There is no cost savings (in fact, there is usually a cost increase because you are now paying a new CEO salary and the severance for the past CEO at the same time.

[Geronimo]

Originally posted by pchang
When companies lay off employees, they are not replaced. There is real cost savings.
When companies get rid of CEOs, they replace them with equally expensive (or even more expensive) CEOs. There is no cost savings (in fact, there is usually a cost increase because you are now paying a new CEO salary and the severance for the past CEO at the same time.

hrmm Perhaps the severances need to be eliminated somehow.

What incentive is there for offering a CEO a good severance in the first place?

If the CEO is so keen on his severance compensation that can't justifiably be reguarded as a good sign.

[Zkribbler]

Originally posted by pchang
When companies lay off employees, they are not replaced. There is real cost savings.

On the other hand, there are fewer people to do the work and the ones who remain have lower morale. So there's less production, fewer sales, and smaller if any profits.

[Geronimo]

Originally posted by Zkribbler


On the other hand, there are fewer people to do the work and the ones who remain have lower morale. So there's less production, fewer sales, and smaller if any profits.

only in the real world.

[pchang]

Originally posted by Zkribbler


On the other hand, there are fewer people to do the work and the ones who remain have lower morale. So there's less production, fewer sales, and smaller if any profits.

I agree. The best way to improve profits is to increase the top line. However, getting rid of people to boost profits for a quarter or two is much easier. The monetary rewards to management are typically the same for increased profits regardless of their origin. 2 -3 quarters later when the staff cuts start killing top line revenue and reducing profits, management simply cuts more employees. This results in the company going into a slow death spiral while management collects hefty bonuses every other quarter or so.

[One_more_turn]

There are companies with people making 100K a year doing nothing other than surfing the web, engaging in office politics, and day-trading stocks.

There are companies with so many people in middle management that absolutely nothing gets done and all the best talents leave. IBM before Gerstner was a classic example.

Layoffs can scare unproductive people becoming more productive. It's not pretty, but it works in many instances.

The globalization has greatly expanded the supply of cheap labor ever since the 1980s, while the labor unions have stuck in the 19th century's nation state mindset. Unless you are in the top 20% of your profession, you are not gonna get much leverage against your employer these days.