Companies are losing, why are CEOs gaining?
Over the weekend, the Associated Press reported that in the midst of layoffs and rising costs, the median compensation package for chief executives in 2007 amounted to roughly $8.4 million.
Data pulled from 410 of the companies included in the S&P 500 index shows that while the economy was slowing down, the compensation for CEOs was going up… over three percent! The combined salaries of the top ten executives eclipsed $500 million.
Members of upper level management present many arguments when posed with the question, “If a company is losing money, why do high ranking executives get paid so much?” Here are the two answers I hear most and my interpretations:
“Executive compensation is determined by market conditions.” Profsilver’s Translation: Everyone else is doing it so we have to keep up.
“Cutting one executive’s salary would not make a major impact on profits.” Profsilver’s Translation: It saves more to cut the wages of many workers than to cut the salary of one manager.
Merrill Lynch CEO John Thain tops the list with a total compensation package of $83 million for 2007, a year in which the company posted record losses. He joined Merrill Lynch on December 1, 2007 and received roughly $57,000 in salary for the month and a $15 million cash bonus. Maybe that was to lure him away from the NYSE???
Being a CEO is a tough job and merits compensation accordingly but the price being placed on the talent of upper level management appears questionable in many cases (to put it mildly). Perhaps shareholders should beg the question…
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2 opinions for Companies are losing, why are CEOs gaining?
Tate Kirk
Jun 18, 2008 at 6:23 pm
CEO Compensation has been a very popular and controversial debate in finance lately. We have recently discussed the subject in FINC312, and learned that the best way for a corporation to align the interests of the shareholders with that of the CEO is through performance-related compensation, such as stock incentives and bonuses. However, a delicate balance must be achieved as too much stock can make the CEO too powerful and may still overcompensate actual performance. It is disappointing, to say the least, to hear of a company like Merrill Lynch award their CEO so much in light of record losses.
Cynthia Lee
Jun 22, 2008 at 4:13 pm
In my BUAD425 course, International Firms; we learned about this phenomenon.. where CEO’s were profiting whilst those beneath them were faltering and flailing into the depths of unemployment through lay-offs. But there is also the other end of the spectrum, where CEO’s who have too lost their jobs.. take PepBoys; its company has seen 5 different CEO’s in 10 years. My translation of “Cutting one executive’s salary would not make a major impact on profits” is that the person who is quoted obviously feels confident that the work of one person (CEO) is better than say 100 workers and his thoughts are quite mistakenly so. Good Luck when the CEO’s still left in a company don’t know how to do the dirty work of those you have just fired.
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