I came across an interesting article in the Wall Street Journal about how more and more companies are taking into account a CEOs net worth and past earnings in order to justify reducing or limiting their compensation. I encourage you to read the article, which can be found in its entirety at Yahoo! Finance.
The article states that Nearly 15% of Fortune 500 firms said they took such “accumulated wealth” into account in setting 2007 executive pay, up from 8.4% in 2006. So it certainly isn’t the norm, but it does look like it is an increasing trend. Even though there has been increased scrutiny on executive compensation, is this a fair practice?
How Much is Too Much?
That is the question, and is there even an answer? Who is it to decide how much wealth is too much? Of course, when asking the typical working class person, they probably thing everyone making six-figures or more is making too much, but isn’t it all relative? One could argue that once someone has tens, or hundreds of millions of dollars that they don’t need to continue to pile on the millions, but where is that line drawn, and is it the same for everyone?
I don’t know the right answer, but I do have some thoughts on the topic. But, I want to ask you first. What do you think? Is this practice fair, unfair, or make no difference? I’m sure there are a number of different opinions on this topic, and feel free to elaborate on them. I’ll chime in later today after the discussion gets started and share my point of view.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
According to me pay should be depend on persons performance only. CEO pays are not determined by performance alone, unless the performance is absolutely worthless. It seems a CEO is paid just for staying around with the company.
Pay should ALWAYS be based on performance. But more importantly, a good CEO needs to realize that, if his company is to succeed (meaning, if he wants to remain CEO) in our modern economy, he is going to need to cut down waste.
The scenario where the CEO voluntarily reduces his mammoth pay (c'mon, dropping your salary from $50mil to $45mil isn't gonna make that big a difference for you, but the savings can be passed to the consumer or your employees!) is probably too much to hope for. However, I still believe CEO's should be punished for failing. If I lose a hundred million dollars at my job, I'll get fired - and maybe even go to jail.
The threat if losing everything for tanking your company should encourage a CEO to be at least somewhat thriftier.
I voted no, and I'm glad to see most of the others did too. No one should be able to control you much money you earn. There should be no limits. It think the reason is obvious. It violates our basic right to exchange our time and services to the highest bidder. If you aren't making enough, limiting someone else's pay won't help you. And Instead, it will likely hurt you economically. What you need to do to earn more money, is make yourself more valuable in the marketplace.
@ Steve - Market value is fine, but many of those packages are put together by boards loaded with CEOs from other companies. The higher they make this guys salary the higher theirs is next time. I voted no, but that doesn't mean I think CEOs are paid what they are worth...they are still over paid.
This is just a terrible idea. Pay should be performance based. Should a teacher have their pay reduced because their last name is Buffett and they are worth millions?
Limiting their pay based on net worth is not fair. It provides no incentives for the best to stick around. What we should be asking is what happens when they fail? We have seen some CEOs lately do horrible jobs without facing much consequences. Just look at their severance packages and you would think they are being rewarded(see number five and 8). To be really fair their pay should change quarter to quarter--pay for performance. Just knowing that CEO pay rose 298.2% in 2005 while the average worker only rose 4.3%. That helps put things in perspective.
Well, I pretty much agree with everything that has been already said. You have to pay for talent, and if you're telling a prospective CEO that his earning potential is going to be capped because they already have a lot of money, they will just go to another company that will pay more. Doesn't seem like a good strategy.
But I also think that the ridiculous golden parachutes are out of control, and I think that is where most of the public outrage comes from. Why should someone who ran the company poorly, lost shareholders billions of dollars, and potentially even cost jobs, get tens, or hundreds of millions of dollars when they leave?
Sure, they have incentive to do well because they own a lot of company stock and want to see it rise as well, but there is also little downside. Who cares if you fail, you'll still get millions. That is not a recipe for innovation and striving to do the best you can.
I agree with the points above, especially Shadox. If CEO pay was limited, or somehow based on net worth, then the talented managers would soon find their way to other companies in other parts of the world who would pay 'the going rate'. Jen hits the nail on the head though discussing when CEOs go bad. Much of the pay of a CEO should be linked to the performance of the company. Losing millions (in some cases billions) and walking away with a pre-arranged 100mn is criminal.
It's not a question of fairness, it is a question of market economics. Companies that limit their CEO's pay based on that executive's net worth, will soon lose their CEOs to to rivals who are willing to pay market rates. Can you imagine losing a world class leader based on some insane, psuedo economic theory? Boards that try to do this will quickly find themselves replaced by shareholders (that is, if the CEOs in question are worth their salt).
Limiting pay is a terrible strategy if the CEO is money-motivated. It's like asking someone to do an amazingly difficult, pressure-packed job out of the kindness of their hearts. I'm not in love with sky's-the-limit pay packages, but I don't think putting caps on people is the way to boost performance. Hopefully, some companies can find non-cash ways to reward top performers to bring some balance to the current situation.
I don't think the compensation should be based on net worth. Instead, it should be based on performance. On a smaller scale, should I get paid less because I have a higher net worth than someone else who does comparable work?
What I find outrageous with CEO compensation is when a CEO runs a company into the ground but walks aways with a ridiculous amount in stock options, cash, etc. I don't have that kind of golden parachute; why should they?
I agree with john - I don't really understand why net worth matters. Is the theory that CEO's with a networth of $500 million may not work as hard as those who are valued at $5 million? Guess I should read the piece.
The whole reason that executive comp is so out of control is that firms need to pay for the best talent - limiting pay based on net worth seems to be couter-intuitive to this.
Now, I am no CEO, but i do a lot of recruiting. And i pay the best for the best. I don't care what they made or have. If you want something, you have to pay for it. IF the best manager out there will add a billion dollars profit and the 2nd best will add 500 million but the first has a ton of cash, i dont think you care what you pay him