From the New York Times:
Link to article
By Nicholas D. Kristof
The business world finally cracked down this week on one of the world's biggest welfare moochers, dragging Michael Eisner out of the chairman's seat at the Walt Disney Company. Probably the only thing that allows Mr. Eisner to hold on to the job of chief executive is that he has been so incompetent — or shrewd? — that he has failed to cultivate not only profits, but also a successor.
The larger question is not why the Disney board allowed Mr. Eisner to run the company nearly into the ground. Rather, it is why it has paid him $285 million since 1996 to do that.
You'd think that the board could have found a chairman to mismanage Disney for only, say, $2 million a year. But corporate boards routinely overpay for mediocrity. Indeed, while corporate America ruthlessly applies capitalism to shave costs in acquiring paper clips or secretaries, the top executive suites tend to be, along with North Korea, the world's last enclaves of socialism.
Mr. Eisner has been at the center of this breakdown in capitalism ever since 1993, when Disney earnings (after an accounting change) fell 63 percent — and he earned $203 million, then the highest pay in history for any executive of a public company. Athletes and movie stars are paid ridiculous sums as well, of course, but at least they earn them in arm's-length negotiations.
The problem with "the great C.E.O. pay heist," as Fortune magazine once called it, is that the free market is not at work here. The average C.E.O. of a major corporation now gets $10.8 million a year, almost 20 times as much as in 1981, as the result of a classic market failure.
"The salary of the chief executive of the large corporation is not a market award for achievement," John Kenneth Galbraith noted back in 1980. "It is frequently in the nature of a warm personal gesture by the individual to himself."
Pay is decided by a few board members, often the C.E.O.'s friends, who are perhaps themselves C.E.O.'s sympathetic to the argument that $200 million is about right for such hard work. Compensation experts are hired for advice, but they know that the way to drum up business is not to save shareholders money.
Look, avarice is human. If secretaries had a similar role in determining their own pay, they'd come up with PowerPoint presentations looking at how their peers were compensated (e.g., the secretary of the Microsoft Corporation, the general secretary of the Chinese Communist Party, winnings of Secretariat) and conclude that $200 million is about right.
Apologists for this market failure offer several defenses:
If chief executives increase shareholder value by $10 billion, what's wrong with giving them a tiny percentage of that as a reward? Nothing — if they agree to hand over the same percentage as a penalty when they lose $10 billion for shareholders. Something is wrong when Jeffrey Skilling of Enron gets $100 million in the run-up to his company's disintegration.
These pay packages are negotiated, reflecting what a good C.E.O. brings on the free market. How's that? There is a huge supply of would-be C.E.O.'s and negligible demand from companies for new ones, so their price should be cheap — if boards would use their leverage. When Jack Welch retired, General Electric held a contest among three underlings to succeed him. Each was desperate to get the job. If G.E. had done its usual tough bargaining, it could have signed Jeffrey Immelt on a 15-year contract for a mere $750,000 a year in salary, plus reasonable incentives for long-term success.
If you don't pay a chief executive an obscene sum, you'll lose him. Nope, it doesn't happen. Except for turnaround experts, C.E.O.'s have few transferable skills and are in little demand elsewhere. The average 63-year-old head of a plastics company has almost zero chance of finding a better job elsewhere. One study found that of 77 cases when a major company had to find a new boss, only twice was this because the C.E.O. had left for another corporate job.
Think about it. If Mr. Eisner, who turns 62 on Sunday, wanted to switch jobs now, what other public company would hire him as its new chief executive? Frankly, Mr. Eisner is so desperate to hold on to his job that Disney should try to charge him for the privilege of remaining in his post.
The bottom line is that pay in corporate America is like manure in agriculture. Spread it around, and it does a lot of good. But pile it up in one place, and it stinks.__
Link to article
By Nicholas D. Kristof
The business world finally cracked down this week on one of the world's biggest welfare moochers, dragging Michael Eisner out of the chairman's seat at the Walt Disney Company. Probably the only thing that allows Mr. Eisner to hold on to the job of chief executive is that he has been so incompetent — or shrewd? — that he has failed to cultivate not only profits, but also a successor.
The larger question is not why the Disney board allowed Mr. Eisner to run the company nearly into the ground. Rather, it is why it has paid him $285 million since 1996 to do that.
You'd think that the board could have found a chairman to mismanage Disney for only, say, $2 million a year. But corporate boards routinely overpay for mediocrity. Indeed, while corporate America ruthlessly applies capitalism to shave costs in acquiring paper clips or secretaries, the top executive suites tend to be, along with North Korea, the world's last enclaves of socialism.
Mr. Eisner has been at the center of this breakdown in capitalism ever since 1993, when Disney earnings (after an accounting change) fell 63 percent — and he earned $203 million, then the highest pay in history for any executive of a public company. Athletes and movie stars are paid ridiculous sums as well, of course, but at least they earn them in arm's-length negotiations.
The problem with "the great C.E.O. pay heist," as Fortune magazine once called it, is that the free market is not at work here. The average C.E.O. of a major corporation now gets $10.8 million a year, almost 20 times as much as in 1981, as the result of a classic market failure.
"The salary of the chief executive of the large corporation is not a market award for achievement," John Kenneth Galbraith noted back in 1980. "It is frequently in the nature of a warm personal gesture by the individual to himself."
Pay is decided by a few board members, often the C.E.O.'s friends, who are perhaps themselves C.E.O.'s sympathetic to the argument that $200 million is about right for such hard work. Compensation experts are hired for advice, but they know that the way to drum up business is not to save shareholders money.
Look, avarice is human. If secretaries had a similar role in determining their own pay, they'd come up with PowerPoint presentations looking at how their peers were compensated (e.g., the secretary of the Microsoft Corporation, the general secretary of the Chinese Communist Party, winnings of Secretariat) and conclude that $200 million is about right.
Apologists for this market failure offer several defenses:
If chief executives increase shareholder value by $10 billion, what's wrong with giving them a tiny percentage of that as a reward? Nothing — if they agree to hand over the same percentage as a penalty when they lose $10 billion for shareholders. Something is wrong when Jeffrey Skilling of Enron gets $100 million in the run-up to his company's disintegration.
These pay packages are negotiated, reflecting what a good C.E.O. brings on the free market. How's that? There is a huge supply of would-be C.E.O.'s and negligible demand from companies for new ones, so their price should be cheap — if boards would use their leverage. When Jack Welch retired, General Electric held a contest among three underlings to succeed him. Each was desperate to get the job. If G.E. had done its usual tough bargaining, it could have signed Jeffrey Immelt on a 15-year contract for a mere $750,000 a year in salary, plus reasonable incentives for long-term success.
If you don't pay a chief executive an obscene sum, you'll lose him. Nope, it doesn't happen. Except for turnaround experts, C.E.O.'s have few transferable skills and are in little demand elsewhere. The average 63-year-old head of a plastics company has almost zero chance of finding a better job elsewhere. One study found that of 77 cases when a major company had to find a new boss, only twice was this because the C.E.O. had left for another corporate job.
Think about it. If Mr. Eisner, who turns 62 on Sunday, wanted to switch jobs now, what other public company would hire him as its new chief executive? Frankly, Mr. Eisner is so desperate to hold on to his job that Disney should try to charge him for the privilege of remaining in his post.
The bottom line is that pay in corporate America is like manure in agriculture. Spread it around, and it does a lot of good. But pile it up in one place, and it stinks.__
