How do you know when CEOs are being paid too much?

There’s an interesting – though not surprising – debate happening on the Web site of my local paper, the Boulder Daily Camera. The article that started things going is New Crocs CEO Getting $850K Salary Signing Bonus and it’s tied to a local shoe manufacturer, Crocs, Inc (NASDAQ: CROX).
The debate is about whether an executive is worth their paycheck, basically, and I’m being generous calling it a “debate” as most of the comments are of a considerably more hostile nature.
For example: “It is obscene that one man – John Duerden – make that kind of income while this company disregards and disrespects those who actually do the work.” or “No wonder this company is broke.” or “People are starving. This is awful.”
crocs footwear.jpegAnd the most unhinged of all: “CEO’s, Enjoy your dishonest wealth and mansions here on earth, while you still have breath. Because, in HELL you won’t find mansions or luxury, just pure torture, terror, and torment.” That one makes me wonder about their personal story, but not so much that I’d risk having tea with them, since I’m one of those capitalist people.
Fortunately, there are some people who seem to understand that as you work your way up the executive ladder at a company your salary naturally increases too. People leaving comments like “Tough job, seems about right to me……” and even backhanded swipes like “Crocs is a bad company with a fad product that probably should never have gone public; but this CEO is hardly in the upper echelon with this compensation package”
What I want to examine here isn’t whether new Crocs CEO John Duerden is underpaid or overpaid but rather to explore the idea that executives should be paid whatever the market allows.
We’re not talking about the manager of the local Starbucks (NASDAQ:SBUX), note, but a large publicly traded company with a global presence.
This is quite relevant for another reason too, because with the bailouts and other government attempts to shore up our broken industries, the question of how much is too much for CEO pay immediately comes into question within that context again, and vociferously.
Anyone being paid millions for doing their job seems hard to justify, but it’s like athletes: if you’re playing at the level where you should get $4mil/year, why would you take a job offering you $500K instead?
And if you, as a top athlete, won’t take the offer that’s undervaluing your skills and expertise, who would take that kind of job offer and would they really help build a winning team? You know the answer: someone less capable, someone less valued by the industry at large.
This is directly relevant to executives. If you’re looking for a new CEO to take over your publicly traded company and try to restore the stock value for the many shareholders, isn’t it your fiduciary and moral obligation to find the very best person you can to fill that job?
It’s clear, I hope, that you can’t get top quality people by offering a second-rate salary. Ergo, Duerden at Crocs being offered what seems like a tremendous salary but in fact is probably an average salary for a clothing company of the size of Crocs. If he were #1 at General Motors (NYSE: GM) being paid huge salaries even as the company goes to Washington to ask for bailout money, people go apoplectic. I just ask that you think about it for a minute instead of being enraged.
Do you really think that a company like General Motors can attract the top-notch people it needs to reinvent itself by offering salaries that are 10x what a line worker makes? I don’t.
And the consequences of getting an inferior candidate because you can’t offer a competitive salary? Well, that should be obvious.

8 comments on “How do you know when CEOs are being paid too much?

  1. The Daily Camera lists comparable execs in the industry. He’s right in the middle. Any rational person can see that he’s basically getting paid his worth. If Crocs hired a CEO whose salary was 250k, he’d be under experienced and the stock would probably CRASH. To get experience, you have to pay for it.

  2. > Do you really think that a company like General Motors can attract the top-notch people it needs to reinvent itself by offering salaries that are 10x what a line worker makes? I don’t.
    You are labouring under the illusion that it is “top-notch people” (and, at those salaries, presumably only a few of them) that turn around companies like General Motors.
    But I find little evidence to support that contention. What creates ‘top notch people’ tends to be a matter of luck and hard work as much as anything else.
    Moreover, being ‘top notch’ appears to contextually bound and localized. They aren’t just generics you can swap from one company to the next.
    That’s why we see so many ‘top notch’ people go from the scene of their success to an utter failure.
    For an enterprise like GM to be successful, it takes a large number of factors to be in place, not the least of which is the dedicated effort of the majority of its staff, each of whom is no less deserving of the lable of ‘top notch’ than the person at the head.
    Paying management a reasonable wage and ending the looting of the company by upper management would go a long way toward improving the output of the corporation. So would replacing ownership by absentee slumloards with the actual plant workers (it’s working in places like Westjet).
    Finally, much of the outrage is based on the fact that it is the ‘top notch’ management that received such a princely wage that, collectively through greedy, short-sighted and often unethical decision-making, have led our society to the brink of ruin.

  3. I have found in nearly all aspects in life you do indeed get what you pay for. Those able and willing to pay for top talent will likely receive top performance – of course this is not guaranteed as little in life is. As Stephen Downes mentioned in the preceding comment, performance is contextual. Although strong leadership increases the probability of success, the overall context of their interaction with a given team is the driving factor – and not all teams are created equal. My personal belief is that this is the value of a great CEO – the ability to recognize, cultivate, and/or create a winning team that drives the entire organization while leading from the front.
    Is a CEOs pay too high? Every situation is unique. Of course this is a highly subjective question, money is relative to what a person is used to. My personal opinion – as a business if you are not asking for money from the government, then the government or public should not dictate what is considered “fair”. However, if as a business you are requesting money from the government in the form of a bailout (especially multiple bailouts), the corporation should have to waive its rights and cede to government and public scrutiny.

  4. “Do you really think that a company like General Motors can attract the top-notch people it needs to reinvent itself by offering salaries that are 10x what a line worker makes? ”
    I don’t understand why this question is asked so often. These “top notch people” just FAILED in their most important objective. So they are NOT TOP NOTCH PEOPLE. If they had made money for the the company rather than allowed it to need a bailout, then perhaps we wouldn’t be talking about this.

  5. I think the answer to the question
    “How do you know when CEOs are being paid too much?”
    is: when their pay has nothing to do with their performance.
    Very simple. The CEOs are responsible for making a profit, ie. for making money for the shareholders. If they cannot succeed in this task, then by no means should they receive a bonus. A bonus, by definition is something IN ADDITION to ones regular pay.
    On your other point regarding astronomical salaries being necessary to hire CEOs who are high performers: well, for all those who take bailout money, not only have they failed and not performed, but they aren’t as competitive for positions in companies that did not fail. Their value just declined because of their most recent failure. Thus, if we put a cap on the salaries of ALL executives who receive bailout money, we’re all good. If they perform better in the future, then maybe they will deserve their bonuses.
    Simple

  6. CEOs can be paid any amount they want, no matter how high. JUST MAKE SURE THEY COME WITH A MONEY BACK GUARANTEE!
    They are there to do a job, and if they can’t do it, why are they even paid?
    And what are the responsibilities of a CEO who gets paid hundreds of millions and whose company goes bankrupt? Getting fired? Hey, that’s what happens when people on the ground screw up too.
    I’m really very interested in the performance and consequences part rather than the salary details.

  7. I think there should be some kind of balance on the salary of CEOs. Though they are on the top but some companies over pay them. There should be a justification, because at the end that burdon will come to consumers.

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