Re: Are CEO's salaries bloated?

 Are CEOs paid too much for their work? 


Forget for a moment that we are talking about a CEO.  What should we pay any individual that works in an organization.  And the answer is that it depends on market condition.  On the supply side we have X individuals with the right skills to fill the position and the individual is willing to work for a certain asking price.  On the demand side we have a number of open positions with their respective bidding price.  Typically the company is bidding an price in relation to the "value" the position brings to the company.  The value minus the price should leave a residual amount to the hiring company since the company is in the business of making money.

When the service station hires a mechanic to work on a car?  Assuming that Service station is in the business of making money, it will pay the mechanic the residual amount from Revenue-expenses-profit.  I am ignoring the market forces affecting Revenue.  Since the mechanic is paid hourly and the repairs are billed hourly then the mechanics compensation is directly related to the value he brings into the company.

Similarly with professional athletes.  Their compensation should be based on the value they bring to the team (this is a little bit more blurry than calculating the number of hours a mechanics works).  The marginal value comes in the form of additional ticket sales, t-shirts, caps, etc  Playing well is only relevant if it affects the ecomic value he brings to the team.  The marginal value provided by the player must surpass the player's compensation for the compensation to make economic sense.  In this case it is harder to draw a direct relationship between a specific athlete and the economic value they bring to the team.  But it is possible to estimate.  But there are no contractual obligation for the athlete to continue to provide that value for the duration of the contract.

Same goes for CEO.  The CEO must bring in economic value to the company in excess of their compensation.  What value might the CEO bring in? Reduce executive turn over, improved credit rating, stable investor relations, Product and service leader, business innovation, etc.  In this case it is extremely hard to estimate the potential executive turn over, or the improved credit rating.  It might be possible in some circumstances.  Just like the athlete the CEO's compensation is not directly related to the value they bring in.  Some component of the compensation is related such as stock option, but other cash bonuses are not related to performance.

If a CEO brings in the value in excess of their compensation to a company, they should be paid accordingly.  Nobody complains when an artist, movie star or athlete make huge amount of money so why focus on CEO.

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