Friday, February 23, 2007

Are CEOs worth it?

Here's an interesting position (I seem to like contrarian and unpopular positions for some reason); Jerry Taylor and Jagadeesh Gokhale from Cato make the argument that CEOs may be underpaid:

A 1997 study by Harvard economists Brian Hall and Jeffrey Leibman examined 15 years worth of data relating to CEO pay and corporate performance. Messrs. Hall and Leibman found that, for 1994, every additional dollar given to a CEO translated into an average return of $3.90 for the company. While subsequent studies have highlighted the ambiguities associated with studies like this, the evolution of CEO compensation arrangements strongly suggests that corporate boards are increasing compensation packages for a reason -- to improve performance.
[...] The inference from Mr. Bush's statement -- that rising CEO pay is fueling income inequality -- thus begs the question about whether rising CEO pay is improving corporate performance. If it is, then workers might well be better off if CEOs were paid even more. And if it isn't, then the market will either punish firms that are overpaying for executive talent, or shareholders would lose. To us, the only excess here is the attention politicians are "paying" to the issue.
I tend to agree - the onus of responsibility of ensuring that the investment in strong executive talent is the responsibility of shareholders, who delegate responsibility through directors, who in turn have a fiduciary responsibility for representing their interest. If I recall this whole mess with options is the direct result of Congress tinkering with what they deem fair in executive pay.

No comments: