Tag Archives: CEO pay

% Australian top incomes from wages, salaries and pensions since 1954

Australia has had a working rich for a long time now. Australian top income earners are top wage earners. They are athletes, celebrities, business executives and in the professions.

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Source: The World Wealth and Income Database.

% US top incomes from wages, salaries and pensions, 1913 – 2015,

The rich in the USA long ago became a working rich; most top incomes are from wages and salaries.

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Source: The World Wealth and Income Database.

Creative destruction in top ICT company pay

I am surprised to see that Yahoo is in business much less competing for top talent. Microsoft is in decline too. Apple does not pay people as much as everybody else.

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Source: Paysa Company Rank | Paysa.

Some other colours seem to duplicate so you will have to work out which is which by when they exploded in hiring top talent.

Are CEOs denied their labour surplus?

Bang Dang Nguyen and Kasper Meisner Nielsen looked at how share prices reacted to 149 cases of the chief executive or another prominent manager dying suddenly in American companies between 1991 and 2008.

If the shares rise on an executive’s death, he was overpaid; if they fall, he was not. Only 42% of the bosses studied were overpaid. Those with the bigger pay packages gave the best value for money as measured by the share-price slump when they passed away unexpectedly.

Share prices do speak to the value of the company and the contribution of its CEO. The share price of Apple went up and down by billions on the back of rumours about the health of Steve Jobs.

In terms of splitting of what some call the labour surplus increase from a firm hiring an executive, these employees retain on average about 71% and their employer keeps 29%. Others call this rent sharing.

71% going to the CEO might initially sound high, “but it’s not like he’s taking home more than he produced for the company,” says Nguyen.

The exploitation of CEOs gets worse when you consider the extensive use of promotion tournaments by their employers when setting their wages. They are thrust into rat races. Promotion tournaments are an integral and often invisible part of their workplaces.

Executive level employees are often ranked by their employers relative to each other and promoted not for being good at their jobs but for being better than their rivals. These promotion tournaments sent one employee against another – one worker against another – to the  profit of the owners of the firm.

The rat race set up by the owners of the firm are so cutthroat that in competitions to determine promotions the capitalists who own the firm may find that their employees discover that the most efficient way of winning a promotion is by sabotaging the efforts of their rivals.

Lazear and Rozen’s tournament theory of executive pay has stood the test of time. The key to this rat race is the larger is your boss’s pay, the bigger the motivation for you as an underling to work for a promotion. As Lazear wrote in his book, Personnel Economics for Managers

The salary of the vice president acts not so much as motivation for the vice president as it does as motivation for the assistant vice presidents.

Why hasn’t the Occupy Wall Street movement protested against this?

The occupations of the top 1% and the top 0.1%

"You didn’t build that" – which of sport superstars, celebrities and top CEOs earn their pay more?

Defenders have also pointed to the pay of pro ballplayers or Hollywood stars, but they do not determine their own pay (as CEOs do) and are paid based on performance. Once they begin to fail, they are dumped. By contrast, CEO pay isn’t tied to performance in any meaningful way.

Bruce Murphy – The Incredible Rise of CEO Pay

It’s a big concession to say that athletes and celebrities earn their pay but top CEOs don’t. Most of all, that concession changes the case against the top 1% from inequality to just desert – a big shift in theories of distributive justice. It’s also a big risk to base the argument for greater equality and a 80% top tax rate not only on the excesses of CEOs but on the very specific and testable hypothesis that these CEOs determine their own pay.

if we are to look at CEOs, top athletes and Hollywood celebrities, it is the athletes and celebrities who benefited the most from the windfall of been able to service huge markets through the global media market.

Figure 1: CEO pay and share market performance

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Source:  Economic Policy Institute.

CEOs actually have to run large complex companies to earn their pay, which is why their compensation tracks the share market relatively closely. Athletes and celebrities don’t do that what they do any better than in the past. They simply do it in front of a global media market. Since the late 1970s, the ratio of average pay of CEOs of large public companies to the average market value of those companies has stayed relatively constant: CEO pay grew hand in hand with corporations.

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Steven Kaplan and Joshua Rauh make a number of basic points backed up by detailed evidence about CEO pay:

  • While top CEO pay has increased, so has the pay of private company executives and hedge fund and private equity investors;
  • ICT advances increase the pay of many – of professional athletes (technology increases their marginal product by allowing them to reach more consumers), Wall Street investors (technology allows them to acquire information and trade large amounts more easily), CEOs and technology entrepreneurs in the Forbes 400; and
  • Technology allows top executives and financiers to manage larger organizations and asset pools  – a loosening of social norms and a lack of independent control of CEO pacesetting does not explain similar increases in pay for private companies–  technology explains it;

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To put it simply:

If the reason for growth of incomes at the very top is, say, managerial power in publicly owned companies, then one would expect the increases in income at the top levels to be much larger for that group.

But the breadth of the occupations that have seen a rise in top income levels is much more consistent with the argument that the increase in “superstar” pay (or pay at the top) has been driven by the growth of information and communications technology, and the ways this technology allows individuals with particular skills that are in high demand to expand the scale of their performance.

As for the turnover argument, that underperforming athletes and celebrities are dropped, prior to the GFC, CEO turnover was already on the rise:

Turnover is 14.9% from 1992 to 2005, implying an average tenure as CEO of less than seven years. In the more recent period since 1998, total CEO turnover increases to 16.5%, implying an average tenure of just over six years.

Internal turnover is significantly related to three components of firm performance – performance relative to industry, industry performance relative to the overall market, and the performance of the overall stock market.

Only 21.3% of CEOs in 1992 remained in that role in 1999; only 16.35% of CEOS on the job in 2000 were there in 2007. In any given year, one out of six Fortune 500 CEOs loses their jobs, compared to one out of 10 in the 1970s.

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Dirk Jenter and Fadi Kanaan in a study of of 3,365 CEO turnovers from 1993 to 2009 found that:

CEOs are significantly more likely to be dismissed from their jobs after bad industry and, to a lesser extent, after bad market performance. A decline in industry performance from the 90th to the 10thpercentile doubles the probability of a forced CEO turnover.

In another study, Kaplan found that average CEO pay increased substantially during the 1990s, but declined by more than 30% from peak levels reached around 2000.

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In addition, private company executives have seen their pay increase by at least as much as public companies. Private company executives with fewer agency problems have increased by more than public company executives. To close with another quote from Kaplan:

The point of these comparisons is to confirm that while public company CEOs earn a great deal, they are not unique. Other groups with similar backgrounds–private company executives, corporate lawyers, hedge fund investors, private equity investors and others—have seen significant pay increases where there is a competitive market for talent and managerial power problems are absent.

Again, if one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why these professional groups have had a similar or even higher growth in pay. It seems more likely that a meaningful portion of the increase in CEO pay has been driven by market forces as well.