Oct 02 2008
Private Market Compensation: AIG CEO vs. Kobe Bryant
Published by Steve Latter at 6:53 am under
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Wikipedia“Anger”, more so than “fear”, is perhaps the most often expressed emotion by U.S. citizens, Congressmen, and media analysts when discussing the proposed $700B federal bailout of the U.S. financial system. “Anger” is the primary emotion because the $700B will be put at risk by the American taxpayer to bailout the very same financial institutions that have become increasingly reckless and greedy regarding their investing and borrowing practices.
In America, especially over the last two weeks, the discussion of a bailout to save our financial system and economy from ruin has become logically intertwined with a concurrent discussion of Chief Executive Officer (CEO) compensation packages. Many are outrgaged, especially in light of the horrendous financial results and excessive risk taking, when finding out about the lucrative CEO compensation packages consisting of base pay, bonuses, stock options, and termination (severence) pay.
Let’s analyze this topic by comparing the compensation packages of basketball superstar Kobe Bryant and recently fired AIG CEO Martin Sullivan.
In 2007, Kobe Bryant earned $20 million dollars playing basketball for the Los Angeles Lakers while Martin Sullivan earned $14 million dollars in 2007 running AIG, one of the largest insurance companies in the world.
In 2006, Bryant also earned $20 million for the year, whereas Sullivan earned $27 million as AIG’s financial performance was much stronger in 2006 versus 2007, causing Sullivan’s 2006 incentive-based compensation to be higher than 2007.
Now the big one: Sullivan’s 2008 termination or severence pay upon his firing as AIG CEO was $47 million dollars (two years pay)! Pretty nice “goodbye present” for Sullivan given the fact that AIG failed causing its owners (the stockholders) and potentially our country (taxpayers via bailout) to be crushed! Although Bryant has no termination or severence bonus built into his contract, his contract is guaranteed through 2011 which is somewhat similar to Sullivan’s “severence deal” in that Bryant is guaranteed payment should he be injured.
Thus, both compensation packages (Bryant and Sullivan) are somewhat similar in dollar amount, but beg the question: Is anyone worth that much money?
So the primary question of this blog is to discuss whether private market compensation, should be somewhat controlled or limited by governmental law, and if so, how.
Let’s start with Bryant.
If we passed a law taking the position that Bryant’s salary could not exceed $5 million per year, he would likely go play in Europe where European contracts are becoming more competitive and similar to U.S. contracts. Even if Bryant did stay with the Lakers, despite the new law, at $5 million per year, the $5 million savings (reduced salary) would go to the Lakers owner, Jerry Buss, so Buss would be making $5 million more at Bryant’s expense. In summary, we would have passed a compensation limiting law taking money from Bryant and giving it to the owner! Through the study of economics we ultimately understand that Bryant is, in essence, being paid by you and I whenever we see him at the arena (ticket prices) or watch him on TV (ad revenues). Ultimately, Bryant gets $20 million because we, not Buss, pay him $20 million! This is the private market at work, where voluntarily owners (Buss) pay their employees (Bryant) what they believe they are worth. Said one last way, Buss pays Bryant $20 Million per year because Buss thinks he can make more profit than if he doesn’t and loses Bryant to another team.
Let’s go to Sullivan now.
If we passed a law limiting executive salaries to some arbitrary number, say $5 million per year, the same thing would happen that happened to Bryant. The Harvard & Yale MBAs would not pursue American companies but would go to work at Canadian, European and Asian companies whose compensation would be “free market”. The U.S. would lose its best talent and our companies would become mediocre, fail at an increasing rate, and our standard of living would deteriorate as our leadership quality would deteriorate. It is the CEO that is at the helm of companies helping American businesses to produce an average 10.4% return for their owners (stockholders).
Now we get to the toughest question which is “should CEOs be paid a multi-million dollar severence payment after they have failed and been fired?” The obvious answer seems to be no! But sometimes, what appears to seem to be the obvious answer becomes less obvious in a free market. Any smart, Harvard or Yale MBA knows that they have a 50/50 chance of failing and being fired within their first 3 years as CEO. Statistics bear this out as CEOs are fired all the time as it is easier to fire the CEO than all of the employees. Large firms need the best talent and a talented CEO knows that sometimes their companies fail quickly often for reasons beyond their control no matter how talented they are. Thus, CEOs demand an “insurance payment” called severence pay to compensate them for their high risk and rate of failure. Once the CEO fails it becomes increasingly difficult to get that next CEO job as their reputation in the market place sours. Thus, a CEO looks at the entire compensation package (salary, incentives, and severence) when deciding where to work. If the risk is too high (dedicating their life to their business in lieu of their families) relative to the reward, they will take their talents elsewhere or to a new career.
What is my suggested government solution regarding trying to protect shareholders from excessive executive compensation? I suggest that our government only pass new law to increase ”disclosure requirements” on executive compensation to provide a better ”check and balance” on the Board of Directors who set the pay and severence amounts for the CEOs. The Government (SEC) should not get involved, in my opinion, with compensation limits or restrictions on severence pay, but they should pass a new law to provide greater visibility for the owners (stockholders) on their CEO’s (and other key management) compensation. For example, even though today all executive compensation is publicly accessible by the owners by examining publicly filed documents, the Government could pass new legislation making it mandatory for companies to send an annual letter directly to its owners (stockholders) outlining only their CEO’s and Board’s compensation.
But , please Government, be careful and don’t do anything stupid like setting maximums for CEO compensation.
Discussion Questions:
- In your opinion, should the Government limit CEO salaries to some maximum? What about their severence payments, should they be limited? If so, how would you set the maximum amount?
- Is it fair that Kobe Bryant makes more than a police offer? Why or why not?
- What specific action should the Government take, if any, regarding executive compensation?
About the author: Mr. Latter teaches various business courses at Paul VI Catholic High School in Fairfax, Virginia (USA) including AP Economics,
Accounting, Marketing, and Personal Finance.
Mr. Latter is a Certified Public Accountant (CPA) and former Chief Financial Officer with 8 years of high school business teaching experience. Prior to his career change to teaching in 2000, Mr. Latter spent 21 years in various auditing, accounting, and financial positions with Price Waterhouse, Sprint, and Teleglobe. 
1. In your opinion, should the Government limit CEO salaries to some maximum? What about their severence payments, should they be limited? If so, how would you set the maximum amount?
I do not think limiting CEO salaries to some maximum goes with the whole philosophy of a market economy. The economic self of these individuals will greatly motivate them to make the company as successful as possible. I do however feel that limiting severence is quite sensible. Compensation for poor results does not make seem like good business to me. I believe that you said in class that severence was to cover CEOs in the case that things go poorly that is completely out of their control. The reverse is possible, that they are inept but situations out of their control stimulate success. This appears to me to be a big reward with little “punishment” for poor results. I look at a CEO as I do a member of Congress, they could do all in their power to facilitate good results but if this never comes to fruition then they get “voted out” or fired. This just comes with the territory.
As to set the maximum amount of severence, I have two ideas:
1. the shareholders of the company vote annually (this can prevent the CEO from getting himself a gigantic payout)
2. the severence is a minimal percentage of his salary
2. Is it fair that Kobe Bryant makes more than a police offer? Why or why not?
This is by no means “fair” but that does not mean it is completely wrong. As a society we have grown to have a some what distorted value system assigned to people of different occupations. Polices officers and teachers both greatly benefit society much more than Kobe ever will!!! While they deserve more money, I know that most teachers and polices officers don’t choice their career to make the big bucks.
One can not blame Kobe for making all the money he can. We, the fans, have determined that he is worth that much and kudos to him for convincing people his as valuable as 605 school teachers per year.
The AFT teacher salary survey for the 2004-05 school year found that the average teacher salary was $47,602
Kobe Bryant $28,800,000.00 (2006)
3. What specific action should the Government take, if any, regarding executive compensation?
This is a pretty fragile issue. I wish that every major corporation would be sensible in their rewarding a executive compensation, this way the government would have little reason to regulate this. I feel that if a CEO is fired while the company is still in relatively good financial standing, then the government has no right to step in. However if the company is receiving any sort of governmental assistence, whether filing for bankruptcy or getting a “bailout”, then they government is obligated to limit the money being used for non-productive uses. This means the money given to to former CEO does nothing to better the company’s financial situation, this money could be used to pay off debt. An analogy is when a parent says “When you are on your own do what ever you want, but while you are under my roof to obey my rules.” When a corporation is “under the protective wing” of the government, then they must be subject to regulations which the government has every right to make for situations such as this current “bailout” situation.
Colin, I disagree that it isn’t fair that Kobe Bryant makes more than a police officer, and I also fail to see how teachers and police officers benefit society so much more than Kobe Bryant ever will. Kobe Bryant makes as much money as he does because we are willing to pay him 20 million dollars a year. Kobe Bryant has a unique skill that only a minute number of individuals can even compare to, if at all. There’s only one Kobe Bryant, but there are millions of teachers and police officers. Kobe Bryant is a scarce resource- he is desirable, and there’s only one of him. Teachers and police officers, while limited, don’t even approach the level of Kobe Bryant’s scarcity- they are still desirable, which is why we pay for them, but Kobe Bryant, as an individual, is a lot more desirable than a single teacher or police officer. Benefiting society doesn’t only include services like education, security, medical availability, and so forth. Society also need services such as entertainment, and Kobe Bryant fulfills this role, and who’s to say that he isn’t more beneficial than a teacher or a police officer. If we’re paying him about fifty times the salary as a teacher or police officer, I’d think he’d be more beneficial, not less.
Additionally, in a free market economy it isn’t about whom “benefits society most”- it’s about the unlimited desires of humans; and we simply desire Kobe Bryant more than we do a single teacher or police officer, and as there is only one Kobe Bryant, we’re willing to pay a large quantity of money for his service. Kobe Bryant is simply more valuable; it’s not a question of being “fair”. “Fair” cannot be applied to a free market economy, as we are the ones who control the decentralized economy.
For your answer to question three, I fail to see how companies can be “sensible” about executive compensation. Companies implement all these policies to protect the CEO because it’s such a risky position in a company. However, it’s important to see that the companies don’t implement the policies to solely protect the CEO. If they didn’t, no CEOs would apply for a position because other companies offer better protection for them. CEOs will automatically apply for the job with the least risk, so companies attempt to create this environment, so that CEOs do apply. It has nothing to do with the company “wanting” to protect the CEO, it has everything to do in the company wanting to actually get a good CEO. Severance simply exists so that CEOs actually apply to a company- because it’s such a risky position.
I do agree on passing a law to provide greater visibility to the stockholders. As a basic concept of economics, we make our decisions on the limited information we have, so, the more the merrier. This is also much less intrusive upon a free market, and limit’s the government’s interference. But hey- perhaps this isn’t the best solution? Perhaps a free market economy is destined to fail (As we see in the United States currently). Perhaps, it’s best when the government intervenes. We have to see how the economic crisis in the United States ends up.
Hello Colin and Rob,
I just want to thank you both for two fantastic posts! 5-Stars to both of you!
Colin, you have some great insightful points, too numerous to comment to all. I like your concern about finding ways to better motivate and control severence pay, and I do like your add on point about that in the unique case of federal bailout monies paid to a private enterprise that perhaps severence money should be off the table.
Rob, your response is also a work of economic art and strong theory understanding. I, for one, clearly share your views on all of your points! Are you an Econ professor at Princeton?
Yes, the study of Economics regarding self interest and the pursuit of profits can be interesting. As Adam Smith said, economic self interest can promote the social good (Kobe’s dunks and CEOs productions of iPods). Both of you prove that what seems to be obvious on the surface (”that’s riduculous that these guys make that much money”) is often a very logical explanation of the enterprise pursuit of talented CEOs, who will only accept that challenge with an appropriate compensation for both results (financial success) and risk (termination).
Regards to both of you!
1. Yes. Yes. The limit should apply to CEOs of companies that are ongoing enterprises–CEOs who have very little to do with how such a bureaucratic organization does year in and year out. Most of us could be the CEO of that kind of organization, and whether the company does good or bad will have little to do with what we do. That kind of CEO should get no more than a million a year. Nobody in that kind of situation is worth more than that. There’s another category of CEOs that I would call the Bill Gates category. He founded Microsoft and had a lot to do with its becoming what it is. He could be paid gazillions a year. His successors would fall into the first category.
2. No. He’s playing a game.
3. Before the last few weeks, I would have been reluctant for the government to have too much of a direct role in this other than keeping pressure on BOD’s to rein in ridiculous, if not immoral, executive comp. Now that the government is nationalizing private companies, I think we’ve moved beyond capitalism and free markets to some kind of quasi-socialistic system, which will surely become more so as tme passes. We’ve crossed the Rubicon. Thus, the bailout should impose restrictions on the comp of the CEOs and other executives in the companies being bailed out (a million dollars sounds about right). As we drift further toward socialism, the government can feel free to enact legislation imposing limits on all CEO comp, as it’s clear that all companies will increasingly rely on the government instead of the markets.
Hi John,
Thanks for the post! I love discussing economics. My wife will only talk to me for 5 minutes a day on the subject.
So you think CEOs are overpaid. Fair enough. Most people do. Let’s try these two points just for fun to show a different perspective:
1. This is a good ratio that might show CEOs are not so highly paid relative to their value.
2007 Wal-Mart Actual results:
2007 Profits: $12, 731,000,000 ($12.7B)
2007 Profits excl. CEO comp $12, 701,000,000 ($12.7B)
CEO compensation/Company profits: .2% (owners get 99.8% of profits)
Of course, this is one of the very best CEO comp/profits ratios along with, say, an Exxon-Mobil, Johnson & Johnson, or Coca Cola.
If we did this comparison this year with an AIG, Lehman brothers, or Merrill Lynch it would be CEO compensation on top of losses which is why it is being discussed so much.
2. Here’s another perhaps more powerful analogy: On average, I would estimate that CEO compensation as a % of Corporate profits of the 500 largest companies is about .5%. Hey I usually tip 15% of my bill to my waiter, so giving a .5% “tip” to my CEO is nothing even if he screws up on me. On really bad restaurant service (analogous to losses in Corporate America)) I still give at least a 5% tip to my waiter ’cause it really might not be the waiter’s fault.
Thanks for the discussion!
Steve
Hi Mr. Latter,
That analogy with the waiter is great; puts it into perspective!.
In reply to John’s comment, I don’t believe that any individual can possibly be “overpaid”. Basic economics, or rather, basic common sense, makes humans logical and reasonable. We are only willing to pay a CEO as much as we think he/she is worth, and not a penny more. Under this basic principal, “overpaying” simply doesn’t exist, as the CEO is worth his/her salary to the company. The benefit of the CEO (the revenue that the CEO creates by doing his/her job well) exceeds the cost (his/her salary), so the CEO is completely worth his/her multi-million dollar salary, as his/her work results in that company/shareholders gaining more than the CEO is paid. In theory, this is how all profitable companies work- they pay their employees a certain amount, but together, those employees bring in more money than they are paid, and thus, the company turns a profit.
In a free market economy, there is no “overpaying”, even if a CEO’s salary, relative to the average salary, is quite a bit higher,- there’s simply markets and trade; we pay what we think the good is worth.
Hello again Rob,
I agree again with your points and logic, but would want to add one other dimension to consider regarding the “good old boys club” called the Board of Directors which sets the compensation.
BODs need to know their being watched to help prevent the natural human tendency of greed in executive compensation. Based on my corporate experience, I say it is easier to be greedy within the “club” and escalate executive compensation to take care of the close-knit team (Board, Chairman, CEO) if there is not enough public disclosure on those salaries. When the executive team (Chairman of Board, CEO, etc.) reports to the owners who are school teachers and software programmers for Oracle, that is not a real comfortable check & balance in my opinion.
Today under current law, one can review executive salaries as public information (10K filings) but not many owners (stockholders) really do. I would like to see a more visible disclosure law to ensure that compensation increases are more visible to the owners including the severence agreements. This could be accomplished in a way as simple as a law having a separate requirement to mail a brief, annual summary (two pages?) showing a two year comparative trend of key executive salaries. I know BODs would hate this law, but it is my sense of “free market” plus government oversite to protect its citizens from corporate greed.
Regards,
Steve
Rob and Steve,
While I appreciate your points of view, since we so far continue to live in a free country where you can say what you think, I must confess that I have an other-worldly feeling when reading your comments. I guess I’m lacking in basic economics and basic common sense.
With all due respect, the waiter-CEO analogy is hardly powerful, unless you’re talking about powerfully inane. Then we move to outrageous humor when the notion is posited that no one in a free market is overpaid. That’s a good one. First of all, we don’t have a free market. And even if we did, one would think that a free market isn’t antithetical to basic reasonableness.
I appreciate the point about BODs, but BODs are composed of groups of rich people who also agree that it’s impossible to overpay one of their kind.
But don’t get me wrong. If there’s someone out there who’ll pay me millions of dollars for a year’s service, I’ll take it. I’ll make my benefactor and you guys proud. It’s obviously not that hard to do.
No, I don’t believe that the Government should limit CEO salaries to some maximum. Limiting their salaries would remove their incentive for doing the best job the can. Placing these limits on the salary would remove one of the great things that make up the free market, self-interest. The CEO’s would lose their motivation to do the best job possible and they would settle with doing mediocre jobs. The CEO’s would realize that it is in his best interest to go elsewhere where he can make a salary without a maximum thus removing those CEO’s with the most talent from our country due to the limits. A limited salary would be very detrimental and I believe that the government should not set limits on the CEO’s salaries.
Yes, I do think it’s fair that Kobe Bryant makes more than a police officer. There is only one Kobe Bryant and there are many police officers. Kobe Bryant draws fans both to attend games and watch games on TV. Kobe Bryant’s motivation is his multi-million dollar salary; one could say that without this salary Kobe Bryant would not be as motivated to perform to the best of his ability. Police officers are not dependent upon a multi-million dollar salary. They work for the satisfaction they get out of protecting society. The Lakers owner pays Kobe Bryant what he deems fair just as the government pays the police what they see as being a fair salary. The Government could not afford to pay each police officer $20 million dollars that would outrage taxpayers and would be illogical to pay them that amount. Although one may argue that Kobe’s job is not as demanding or challenging as the police officers, I believe that their difference in salaries is fair.
I believe that the Government should not do anything regarding executive compensation. I believe that executive compensation should be at the company’s discretion. If the company believes that the executive did not perform how they expected and contributed to the failure of the company then they should take that out of his compensation. On the other hand if the company believes that the executive did all he could and the company’s failure was inevitable then the executive should still receive a fair amount of compensation for the work he put in and all his efforts. Companies should not reward jobs poorly done, and they should reward jobs well done. So I believe that the companies should determine the executive compensation rather than the Government.
I do not believe that the government should limit CEO salaries to a maximum. If the government did so that would take away the CEOs incentive to do their best job and make the most money. It would take away one vital factor that our economy has thrived on for years, self- interest. Self interest is the reason America has the number one economy and if you take that away you also minimize your opportunity for success. Taking away self interest is a recipe for failure. Setting a maximum salary might even go as far as to make the CEO look elsewhere for a better paying job.
I think it is completely fair that Kobe Bryant makes more money than teachers, and police officers. Kobe Bryant has a talent that almost nobody else in the world can match. This talent draws many fans and a lot of money. We are the ones that are paying Kobe Bryant his multi-million dollar salary. It is our dollar votes that make Kobe Bryant so rich. On the other hand there are a lot of teachers and police officers all over the world. Their talents are much more common than that of Kobe Bryant. Kobe Bryant’s rare talent and the peoples’ interest in it attests to his huge salary.
I do not think that the government should limit the CEOs compensation. I believe since CEOs should be compensated because they are the ones that are taking the risks. Without reassurance no person in the right mind would risk themselves for the company. I think the company should set a minimum compensation with a chance to increase the compensation based on the companies success. This gives the CEO reassurance as well as motivation.
1. In your opinion, should the Government limit CEO salaries to some maximum? What about their severence payments, should they be limited? If so, how would you set the maximum amount?
- Yes. In our complicated economic system that I do not understand well, we have something called ’stocks’ this is, as I learned in personal finance class, the investment to the company, and anyone can join in if he has enough money to buy this investment. This stock system is very complicated, (and I personally think that we have to learn psychology to understand this) but the basic understanding is that the ‘profit’ of the company drives the stock price. And often the CEO and many employees have something called ’stock option,’ which mean that they can buy the stock for lower price, if the price of the stock went up. So, it works out like this: When CEO does a great job, he will earn a thousands of money by choosing stock options. But, if he does a yucky job and make the profit go down, he would get his salary, but it will be limited by the government, because it is just unfair that the CEOs of big corporations can get millions of dollars even when they retire and put company in danger. This leaves CEOs with chances to have the big bucks and also the chances to lose the big bucks.
2. Is it fair that Kobe Bryant makes more than a police offer? Why or why not?
-It is fair. As not a big fan of NBA, I have no clue how Kobe Bryant is doing. Maybe he is not good, but just popular, or have an amazing basketball skills, I do not know. However, the important thing is that people pay the money to go see him. Public opinion (Dollar Votes) wants him, and this balances out in the market system. TV channels, Foot Locker, companies that make his shirts, watches, hairbands, armbands, or even the deodorant are willing to pay him big bucks to be on the commercial. A simple equation that applies this example - People’s desire = Big bucks or higher price. (And by the way, who likes policeman who caught you doing 90 one the highway?)
3. What specific action should the Government take, if any, regarding executive compensation?
- Government has been, and still is, taking actions on the executive compensation, but indirectly. The taxes that they put on those money, it counts as one of the actions that government take on the executive compensation. Anyway, I do not think that government should take actions on executive compensation, because executive compensation is, I believe, different from salary. It is an award to the CEO for making the profit greater. As put into school thing, a Good-Job stamp for a sticker that only B+or above students get. If government annoy the businesses even with this compensation, they would not want to do business in US, and we would lose many valuable money-making VIPs that we have.
In my opinion, I do not think that the government should limit the CEO salaries to some maximum. There are many reasons for this statement, but most importantly this would take away some of the competition among employees to become the CEO. If there is a maximum salary for the CEO and an employee thinks that he can make the same amount at some other job, they would not try to compete for this job. If this happens, the CEOs would not be the best possible people suited for the job, but just the people who want the job and have most of the qualifications for it.
In addition to this, the CEOs that are hired would not be as motivated to do their jobs well. They would know the maximum salary that they can get, and would not be motivated to try to receive a better salary based on better performance. On the subject of severance payments, I think that they should be agreed upon and looked over by both the person receiving the severance payment, the company paying it, and the government, just to make sure that everything is just and fair. These people should be paid alot for taking risks and putting their careers on the line, but to a certain extent. This extent should be moderated based on the performance of the person over the time that they have worked there. In this way, this promotes the person to do the best that they can.
This extent ties into the question about Kobe Bryant making more than a polic officer. I think that many people may view this as unfair because the polic officers are putting their lives on the line for our safety everyday, but in the end, we are the ones driving the basketball player’s salary. He would not be paid as much if these people didn’t go to the games or watch him on TV. Although this may not be fair, that’s just the way things are. It would be better to pay the basketball star a larger salary then to lose his membership on the team, and the money that is used for the payment is from our pockets.
I do not think that the government should take any action regarding executive compensation. The reason for this is because this is one of the main responsibilities for the companies, deciding how much to pay the employees. The government should not be involved in this because the companies are only going to do what is in the best interest of the company anyways. When the companies set the salaries, it allows the employees to strive to achieve the better salary as well.
Hi Aaron, Lee, Josh, Cat and Courtney,
Great posts! Thanks!
The government should not limit salaries for CEO’s, for as mentioned this may drive them to foreign markets and businesses, although this may not be totally true because they would sacrifice much of their life in their home country, which they may not be willing to do. Although, a maximum would also reduce the drive for a CEO to push his/her company, in order to gain a greater profit and improve the sales and status of his company. His usual motivation for a greater profit is gone, and this could well impact our economy. A maximum also impacts the free-market values, so it should be left as is. As for severance payments, they should not be limited because how can you set a price for every CEO to pass through the company, as one may deserve more than the other. Simply enough, a Board of the company should meet and through much talk decide on the right severance pay, as that seems the right way to handle it. The CEO should not have much say in his severance pay, cause obviously, that would be biased (whether or not he does have a say I do not know how it works).
Kobe Bryant? Whether or not his salary is fair is always debatable. You could at it like this: he has a job just like any other man, and he has a talent at his job so few have ever possessed, so he is amazing at his job, just as any other man is great at his job. So in that respect, he earns his money. But at the same token, he plays a sport, that takes no real education and true intelligence, not to bash him or say he isn’t intelligent, but also there remains the simple fact that it is just a sport. So fairness is debatable, but the money he earns is part of balancing our economy, and we are the ones who pay him that money in essence, so we cannot complain about his millions. People enjoy his entertainment as any other exciting sports player, so we pay to see it. His salary is our own faults, or accomplishments, if your against or for him.
The Government should take little to no action on executive compensation, except maybe devote boards and committees to such ordeals, if it has not already been done. Letting those involved in the company or around the company decide seems the only real fair way to do. Limiting compensation could result in various problems.
The government should not limit CEO salaries to a maximum. This would eliminate the drive of people to work harder. What would they be working towards? No one would want to do the more difficult job if they were to earn the same salary. I believe it is in the best interest of the company to keep the high CEO salaries. A main point in the economy is to maintain competition. It is also important to preserve competition between employees in the workplace for this will help the economy. As people work towards their own self-interest, they are also working towards the best interest of the whole economy.
I believe it is fair that Kobe Bryant makes more than a police officer. He probably should not be making the millions of dollars that he does, but we are the ones giving him the money. We demand tickets to his basketball games and constantly change the channel to basketball on our tv’s. He has a high pay because we give him that pay. Police officers are very important in our society and we could not do without them, but their pay is just. Kobe Bryant provides the people with entertainment but if many believe his high salary is unfair than they should stop going to his games. The people are the ones who decide the goods and services produced (including the entertainment Kobe provides), and the price at which we pay from them.
I believe that executive compensation is a good idea. It will give a greater opportunity for the very talented to become CEO’s because they will not have to fear as many consequences. Some may argue that compensation should not be given to those who have done a poor job and deserve to be fired. How bad of a job can these CEO’s do though? They would have had to work their way up to gain this position and should be fairly well educated. It is usually best for the government to not get involved in the economy when they don’t need to, but I think this works.
1. I do not believe that the government should set a maximum CEO salary. If CEO’s salaries are limited, they will lose their incentive to work harder for more pay. Say for example the government sets $5 million as the maximum income a CEO can receive. He or she will do the minimum amount of work to make their maximum salary. The most talented and best CEOs might also move to a foreign company to make more which would cause problems for corporations. If there is no salary cap, CEOs will work as hard as they can to make as much as they can. As for government limits of sevrence limits, I think the government should stay out. If sevrence payments are limited, the best and talented CEOs will go to other foreign companies in Canada or anywhere else. Sevrence payments are what attracts people to the high risk job of CEO of a corporation. In short, I believe the goverment needs to stay out of CEOs salaries and their sevrence payments.
2. I think it is fair because even if Kobe’s salary was say $100,000 a year, the proceeds from tickets, commericals, ad, etc would have to go somewhere. Since Kobe Bryant is a large part of the reason the Lakers get the money from tickets, ads, etc he should receive a large amount of the money. I think that the fact his salary stays the same even if he is injured is fair, because he does not know if he will get injured. Sevrence payments follow a similar principle. The job is very high risk, so if something happens, Kobe needs to know that he will still make money. Someone would be getting rich off the way Kobe Bryant plays, so why not Kobe Bryant ?
3. I do not believe the government should not interfere with CEO compensation. I think that CEO compensation should be done at the discretion of the corporation. If the company feels the CEO didnt make expectations, than his compensation will not be as much. If the CEO did agood job, he should get a higher compensation. This will also cause a higher incentive to do a better job and thus make more money. If the CEO does a better job, than the corporation will do better. The bottom line is that government interference takes away incentive. Incentive and competetion is what America’s economy is built on, and if that is taken away the economy will not be the same.
I do not think that the governent should put a max on how much CEO’s can earn and what their severance pay should be. Being a CEO is a tough and stressful job that is very volatile and CEO’s are hired and fired frequently. If a salary cap was placed on the job prospective CEO’s might not pursue that career because it would be too risky for them. This would then cause less talented people to become CEO’s and cause businesses to be less productive.
I do not think that it is necessarily fair that Kobi Bryant makes more money than a police officer but if people are willing to pay him that much to watch him play basketball then he has every right to take advantage of that. Also, being a professional athlete in itself is difficult and takes alot of dedication and skill.
I don’t think the government should interfere at all with executive compensations. the company can decide how much they are giving their top executives. this will of course cause CEO’s salaries to rise because in an increasingly competetive world to get the best you usually have to pay the most.
No, I do not feel that the government should limit how much money a CEO can make. The majority of CEO’s in our country are driven by economic self-intrest. If they feel that they won’t be able to maximize their profits in America because of government limitation, then they will take their work to other country. This would be devastating for our economy if we were to lose all of our pioneering entrepreneurs to other economies. On the question relating to severance pay i believe that there is some need for regulation on that amount. I feel that a CEO’s severance pay should not be a set amount, it can change on an annual basis, based on the previous year’s performance. Therefore if a company had a good year, the CEO has a right to a higher severance payment, if it had a bad year, the CEO’s severance payment can shrink. To eliminate having to evaluate what the actual payment should be I also believe that the payment could be a percentage of that year’s salary.
In regard to the second question, I feel that it is perfectly fair that Kobe Bryant makes more than a police officer. This is just a product of the free market. If we as Americans are willing to contribute to his paycheck, then he has earned it. I personally feel that the safety of the people is more important than viewing a sporting event, therefore i would place my dollar vote towards the police officer. But Kobe Bryant has a skill that not everyone can do which makes his talents worth 20 million dollars.
I believe that the government should not play any role in regards to executive compensation. It is a matter that should be decided at the company’s discretion. As I previously stated the CEO should be payed based on his performance. If the CEO is not happy with his current compensation, then he should work harder to raise the company’s performance, which ultimately will benefit us, the consumers.
I completely agree with your statement in this post. I feel if we did have some sort of maximum limit for CEO payouts then they would not chose to work in the United State. This would cause a huge loss in our standard of living. However i believe that the company should take some steps to prevent the pubic from being outraged at the company. I think that the first way is what Mr. Latter stated, making the company sending out letters to the shareholders about the CEO payout.
I think another way would be to have the company limit the amount of money is spent on useless items. Yes, i am talking about the retreat the big wigs took this week after being bailed out. I think the public would not be ready to start a mob if this had not occurred. Some stricter company policies could go a long way in reducing the publics anger at the company.
1. In your opinion, should the Government limit CEO salaries to some maximum? What about their severence payments, should they be limited? If so, how would you set the maximum amount?
Limiting CEO salaries is a mistake. If the possibility to earn more money disappears, a CEO feels less invested in their company and its performance. Capping CEO salaries would remove the incentive to run companies efficiently and would promote mediocre performance. A cap in income would also make potential CEOs more willing to go abroad to work in foreign markets if more lucrative salaries can be found elsewhere. The same applies to severence payments, if a potential CEO feels that working for an American company will not provide enough job security and compensation if they did lose their job, people will begin to look for work abroad.
2. Is it fair that Kobe Bryant makes more than a police offer? Why or why not?
Fair? Yes. Reasonable? No. The stock market reflects life; the public sometimes bids up the value certain stocks and qualities, but profits and performance ultimately deterimines the value of these stocks and qualities in the long run. Kobe Bryant is a talented basketball player. At the moment, the public highly values individuals who play basketball well, as a result, the market rewards Bryant and he makes a lot of money. The services that a police officer offers, though necessary, are not valued as highly, so the market gives police officers enough to live on, but does not pay them exorbitantly. Though each is paid according to their market value, the amount of money that Kobe makes does not seem reasonable compared to what a police officer’s salary.
3. What specific action should the Government take, if any, regarding executive compensation?
I think that the government should not take any action regarding executive compensation. The market regulates itself and if Kobe Bryant gets to make millions by playing a game just because there is a market for his abilities to play and entertain, executives should also receive compensation if that is what the market dictates.
Very Good discussion.
I am in no way a Business Savvy person, just a common man.
My view is:
The incentive arrangement should be an arrangement that reciprotes. By that, what I mean is Salary & incentive for success and success only.
The goal behind hiring a CEO is to lead the company to success.
What happened in Sullivan’s case is that he benefits more when failing ($47M now) than with success (say 20M per year for 2 years).
To me, it appears to be rewarding someone more to fail than to lead to success.
1. It would be dificult to limit CEO salaries to a maximum as the maximum demanded would exceed the severence payment. The maximum amount should be based on work experience. The severence payment should be limited because if it is too high it already encourages a failure of the CEO.
2. Is it fair? No! But in the economic world it is hard to maintain stability and dificult to prevent unfairness as there are man factors and key players involved. Judging from a broader spectrum one can conclude that though Kobe Bryant is gaining vast amount of dollers “unfairly” it is harming someone on his side (like the manager) despite the opportunity cost of not having Kobe on his team.
3. The Government should create a form of “checks and balances” form of executive compensations, in which the wide and distinct gap is not as noticable. However one could argue that Kobe’s opportunity cost is greater than that of Sullivan’s or police officers’.
As I started reading this article, I found it very concerning that Sullivan was given $47 million dollars after he was fired from AIG, while all the owners were just out of luck when AIG failed. I immediately started to ask myself why the government did not implement some sort of regulation to prevent this. How is it fair that these CEOs make such a huge income, while many other hardworking Americans will never make anywhere near such a salary. However, I now have a deeper understanding of why this is the way it has to be.
I never really thought about how challenging and risky being a CEO truly was. And it seems very logical that they should have such a high income and severance pay. And of course, if the salaries were to be limited, self interest would be affected and the CEOs would not be as concerned with trying to constantly improve the company and make it the best it can be. In my opinion, society can be quick to judge and criticize the salaries of certain jobs, but we really need to try to analyze how much work and stress these people are under before making any pretenses.
This is a very big depate in Switzerland, where the top managers get rediculous bonuses and stocks. This will not change as long a company is run by someone that represents the owner (Stockholders). It is very human to think of the own good first and this is exactly what they do. if you can get 30 million bonus in one year, who would not take the money?
I do not believe that it is the governmet that should intervene in that affaire, it should be dealt with within the company.
The monus should be representative to the performance of the CEO. if they had a bad year there should be a minimal bonus. For a good year bonuses can rise but an amount on 30 million francs just for chrismas is very upseting for the people on the streets, who are eventually the customers.
Here is my opinion:
1. CEO and all executive pay for publicly traded companies should be regulated by the SEC as oversight for shareholders. The greed shown by executives over the past twenty years proves they are not capable to act in the best interest of those they serve.
To argue that excessive compensation is needed to lure the top talent away from forign companies is a farce. CEO pay ratio to an average employee is around 22-1 in Britain, 20-1 in Canada, and 11-1 in Japan. There is limited demand for overpriced executives with poor track records in forign markets. The only reason U.S. CEO’s pay themselves on average a ratio of 400-1 is because there is no oversight to stop them. Board of directors and fellow executives have looked the other way because they were also getting a piece of the pie.
There is no comparison to Kobe Bryant and Martin Sullivan. Sullivan was the CEO of a publicly traded company and was trusted to make decisions in good faith for shareholders. Kobe Bryant is an entertainer that makes up the product or brand that is the Los Angeles Lakers. A fair comparison would be of Sullivan and Wyc Grousbeck. Grousbeck is the CEO of the publicly traded Boston Celtics.
I believe the pay for executives of privatly held companies should be left up to the free market.
2. It is fair that Kobe Bryant makes more than a policeman. Policemen are underpaid and perform a job that is 1000x’s more important to society than that of a entertainer. But there is an abundance of qualified people who will perform the duties of a policeman at that salary level. In contrast there is a limited number of qualified people to fill an extremly limited number of jobs in the NBA. Kobe happens to be one of the best. If the Lakers could pay him less they would. His salary is what the Lakes feel they have to pay to succesfully assemble their product.
3. The Government should set limits to executive compensation based on global market CEO to employee pay ratios. If a CEO goes over the limit they should be investigated by the SEC for abuse. Regulation would keep the process in check.