"The usual explanation given by economists for the positive relation between compensation and firm size is that the largest companies attract the best management. Therefore, bigger companies have to pay their CEOS better in order to discourage them from going to head smaller companies."

If larger companies *attract* the best management, then why would you need a compensation incentive to retain the most talented CEOs? It would seem to me, if you have to pay CEOs more to keep them from going to smaller companies, either *smaller* companies are attracting the best management, or conversely, you're paying mediocre CEOs more to keep smaller companies from getting them.

I have no experience with management in a large (Fortune 500 sized) company; but could it be that the idea of "attracting the best" is really just a notion to bolster what are, actually, averagely talented executives? It would seem when an organization reaches a certain size, the collective knowledge of upper management and the organizational knowledge would be more valuable than the leadership of one single individual. But in order to convince the company (and perhaps public) that the CEO does matter that much, their compensation is inflated in effect to boost their perceived value to the public and the employees.

What are your thoughts on tying CEO compensation exclusively to the performance of the company?

Before reaching a robust conclusion on whether CEOs of public firms are overpaid or not, a study that matches compensation of CEOs of public and private firms of similar size in the U.S. is needed. Chicago, USC and Harvard folks probably know some HR firms that could help provide such proprietary data.

Just to clarify for the first poster: companies "attract" talent with money. In general, potential CEOs are presumed to be indifferent between the size of company and will choose jobs based on pay. Thus, large companies, if they want to get the best talent, have to pay more, and they do so because they have more resources and more at stake than smaller firms.

Why would a CEO be indifferent to the size of the company? If different sized companies present different challenges, environments, etc. is it really accurate to say that the only "attracting" factor to talented CEOs is money?

is it really accurate to say that the only "attracting" factor to talented CEOs is money?

Of course not. That's not what I was saying. CEOs, like all other people, weigh many things when they pick jobs, including prestige, time required, industry, location, and various other qualities. However, those are specific to individual persons and are presumed to cancel out in the population of CEOs that is out there. It is in this way similar to luck, which is presumed to cancel out so that average luck is 0 while individuals have varying experiences. CEO preferences for large/small, established/start-up, northern/southern/western, and other aspects of the job thus likely cancel out and are zero on average, too. This is an assumption of the economic model, and while not exactly true it is approximately true.

This leaves money as the only measurable proxy of what CEOs prefer, and like everyone else, they are presumed to want more money rather than less. Now, while some people will take less money to lead a firm they love rather than more to lead one they hate, on average they will simply follow the money.

The trouble with this analysis is that it assumes that CEO talent is rare and measurable. In other words, that there are only a few people capable of managing large firms, and that it is possible to distinguish them from close contenders. I don't believe that.

I don't claim that there are millions of people who can do it, but I'd guess there are thousands, perhaps tens of thousands, of experienced executives who can run an S&P500 firm, and that there would be little different in the way of results. So why the need to pay absurd sums?

Besides, Becker admits that there are very poorly run firms with seriously overpaid CEO's. To simply dismiss this as "mismanagement happens" is to neglect important evidence that just does not fit one's preferred hypothesis. The existence of these firms shows that there are factors that can lead to serious overcompensation. Why can't the same factors be at work in determining the compensation of CEO's of better-performing firms?

It is interesting that shareholders have, in fact, virtually no control over executive compensation (or the makeup of the board), and efforts to give them control are fiercely resisted by business types (who love to proclaim the glories of the market). Why is that, I suppose?

Are divisions of US firms also bigger than their international peers? If so, I would expect, according to Professor Becker's theory, that US managers below the CEO level would also be more highly compensated than their international peers. Anyone have data on this?

To me the evidence that there is significant cronyism and self-dealing involved in CEO compensation, is that even the worst CEO's, the ones who run compnaies into the ground, get huge golden parachutes.

If it was a fair system, the CEO of Time Warner who bought AOL, or any other disasterous failure would be dismissed out of hand, and told "sue us". After all, he was already paid tens of millions while employed.

Why give him a big retirement package?

As far as I can see, no one has addressed the fact that the agency problems with management compensation are a cost of the huge amount of liquidity provided in the US markets. Instead of complaining to the board, shareholders sell out and move on.

Also, as a college student, I can tell you that most Ivy Leaguers these days could care less about being the CEO of a Fortune 500 company. They would rather work for a private equity firm, consulting firm, investment bank, or hedge fund. The work is stimulating (everything is relative) and compensation is closely tied to results.

"If it was a fair system, the CEO of Time Warner who bought AOL, or any other disasterous failure would be dismissed out of hand, and told "sue us". After all, he was already paid tens of millions while employed."

I can only assume that a CEO's compensation package is written less like an average white collar worker and more like a star athelete. No player is forced to take lower pay or dismissed with no pay when he does not live up to expectations.

In my humble opinion, CEOs ARE overpaid.

I think that Becker is an expert in labor economics and would trust his judgement and his research.

There are many measures of compensation including benefits, options, and salary.

I think the highest paid individual is a person who starts their own company. This was true of the google founders and founders of microsoft.

After that, managers of private equity groups and investors are paid a great deal.

I am not really into counting anyone elses money. I believe that at the end of my life I will probably be paid too much and won't need the money.

At the end of a person's life, we don't ask, "How much were they paid?"

Now at HP Carly was definetly over paid, but Henry
Ford never was,

Gary

I think we can all agree that all this money being wasted on CEOs ought to be transferred to lawyers.

One reason that CEO's seem to receive so much compensation is because our reporting systems and tax system persist in classifying profits made upon exercise of options as compensation, when it might be more consistent with the popular notion of compensation to treat the option grants themselves as the compensation, valuing and taxing them when awarded.

New Booze Allen report shows that Global CEO Turnover set new record in 2005. Lots of interesting findings in the report.

http://www.boozallen.com/home/about/article_news-ideas/3744370?lpid=66005

The usual explanation given by economists for the positive relation between compensation and firm size is that the largest companies attract the best management. Therefore, bigger companies have to pay their CEOS better

So large companies pay their top management more money because their managers are better than most.

[T]he relation between pay and (company) size is likely to be sizable, even when top management in different sized companies do not differ greatly in skills and abilities.

So large companies pay more just because they pay more, and there's no direct link to skill?

I am quite obviously missing something basic here, and I wonder if anyone would be kind enough to explain it to me.

Samantha

That's a good point, I hadn't noticed the apparent contradiction there until you pointed it out. I think the point is that there are two reasons that pay at bigger firms is higher than at lower ones. The first is, as you point out, that bigger firms want the best talent and therefore have to pay more. The second is that management at bigger firms has a bigger social impact because they manage more capital and labor, so that even if management at a bigger firm is no more talented than elsewhere, they will make more money, both as a reflection of their social impact as well as a means of attracting better managers to such positions. That's my take, at least.

Mr. Goshn is not a great CEO. Nissan made great products but did not turn a profit. Mr. Goshn cuts costs, increases profits and lives off products that were in the pipeline. It is an old trick to make a company, or CEO, look good. Time will tell if he can continue to build Nissan, but I have my doubts.

CEOs at GM and Ford may be better then Goshn but they must deal with the problems that they inherited. GM's CEO can cut cost by 50%, but he must still deal with a product that many people do not want.

My point is that CEOs are too often rewarded or punished based on things they have little control over.

The larger the company the less impact that the CEO has on the company. So why should compensation go up as real impact goes down?

The larger the company, the more important the management team. And the larger the pool of talent on the team, the more the CEO is an important but replaceable part. As one person has less impact on the overall success, why should compensation escalate?

Or is the US a tournament that promise rewards to junior executives, a chance at a winning lottery ticket. The very best may not rise to the top, but junior staff increases efforts because it gives them an increased chance at outsized rewards.

Or to at least have a member of their team win, and give them the perks of winning. Feudal Lords backing a King who helps them, even if the King is rewarded - like a King.

The truth may be that the larger the company the more trivial the cost of a CEO. If you overpay, who really cares enough to take action? If the company is doing well you shrug it off. If the company is doing badly, you blame everyone.

Good, thank you, wonderful
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