# CEO salaries,justified?



## donald (Apr 18, 2011)

I was taking a look @ some ceo compensation.I know this has been talked about alot in corporate america.With the gap between the rich and the poor,how do board members come up with compensation.

Take Mr john f lungren ceo of stanley black and decker,this guy made 32,730,259.00 in compensation for 2010,why and how did it get like this?Maybe he is worth his salt...

Its crazy what some of these guys make.


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## sags (May 15, 2010)

It's outrageous.

Nobody needs or deserves that kind of money.

I read that in 2010, the top executives earned the average salary of other Canadians by 2 pm. on January 3rd (the first day of work).

What is even more shameful, is when executives get those kinds of salaries because they eliminated employees, lowered salaries, or shipped work overseas.

There is an ad that runs on the business channels.

The guy owns 165 Wendy Restaurants................165 !!!!

That's the way it works for the big franchises. The same people get first opportunity to obtain a new store in the area. McDonalds do it, Tim Hortons do it...........they all seem to do it.

Warren Buffet recently said that "rich have won", and he is right.

They now own almost everything.


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## Dmoney (Apr 28, 2011)

sags said:


> What is even more shameful, is when executives get those kinds of salaries because they eliminated employees, lowered salaries, or shipped work overseas.


Unfortunately, that's what they are paid to do. Eliminate operating inefficiencies in any way possible. 

I think CEO pay needs to reflect long term rather than short term stock price movements. If we assume that a CEO's role is the maximize shareholder value (stock price), it needs to be the price in 10 years' time, not in 10 months. 

If options granted were at a strike price that reflected say an 8% annual price appreciation with a 10-year horizon, we might see more prudent decisions made. Particularly in the financial industry where 9 years of risky trades and profit taking can be wiped out by 1 year of crashing markets. 

Does anyone deserve $30 million a year? I would argue that if they create $31 million in value, then yes. But only if that is long term value rather than just paper value.


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## OptsyEagle (Nov 29, 2009)

donald said:


> I was taking a look @ some ceo compensation.I know this has been talked about alot in corporate america.With the gap between the rich and the poor,how do board members come up with compensation.
> 
> Its crazy what some of these guys make.


Two reasons. Most board members just like the comradery of being on the board. It fills some of their retirement years or gives them insite and contacts for their real business. Since the CEO's opinion goes a long way for their initial and continual nomination to a board, they have an incentive to keeping these guys happy. We call this the "old boys network" phenomenon and anyways, it's not their money.

The other reason is that since the board is responsible for the appointment of the best CEO they can find, the pay structure becomes a game of leap frog. If their competitor pays their CEO $5 Million per year, the only way they can justify not paying theirs $5 million is to accept that their CEO is not as good as the competitors. If that was the case, then they have failed in their responsibility to find the best CEO. So they take other peoples money and throw it at their CEO and feel good about it, since they need to believe he/she is worth it.

It's a big crock but trying to change it is near impossible.


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## Jungle (Feb 17, 2010)

WHere do you find out how much a ceo makes?


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## andrewf (Mar 1, 2010)

It's tough. A lot of the time, executives are just extracting unearned rents from shareholders. Part of the problem is transparency in CEO compensation, as this leads to a pretty brutal arms race (every CEO needs to be the highest paid in his peer group). The other problem is with stock options and the rather perverse incentives this gives to management. Roger Martin has an interesting book out on the subject, Fixing the Game.


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## ghostryder (Apr 5, 2009)

donald said:


> I was taking a look @ some ceo compensation.I know this has been talked about alot in corporate america.With the gap between the rich and the poor,how do board members come up with compensation.
> 
> Take Mr john f lungren ceo of stanley black and decker,this guy made 32,730,259.00 in compensation for 2010,why and how did it get like this?



He didn't actually get $33M. He got ~$6M in salary. the rest is in stock options etc. If the company does well he does well. If not.....

(hypothetical numbers):

Having $26M in stock options with an exercise price of $50 is not worth much if the share price is only $25 when the option can be exercised. Would you buy a stock for $50/share that you could only sell for $25? (hint: you lose money. A lot of it)

Think about it. If you get the option to by $26M in shares @ $50 a share, but the current FMV of the shares when you exercise them is $50/share, how much do you get if you exercise the option and sell immediately? (hint: nothing)

A CEO who gets $20M in restricted share units (@$50/share) isn't going to get anywhere near $20M if the share price is $10 when the shares become unrestricted and he/she decides to sell. And if the company goes bankrupt before the shares can be sold......


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## financialnoob (Feb 26, 2011)

I have no problem with people earning ridiculous amounts of money if they deserve it. But taking Dmoney's example, a CEO who earns his company $31M doesn't deserve $30M in my mind. For one thing, that's not really a great return. Of course it depends on the company, but if it's a company willing to pay $30M for a CEO, I'd expect a lot more money is involved and a bigger profit would be necessary to justify that kind of pay. Plus there are plenty of ways to hack and slash to short-term profits, and a good CEO should be thinking longer-term instead.

I think we can go back and forth on what a good CEO is worth, but at the very least, can we agree that bad CEOs should not be paid tens of millions of dollars to quit? Léo Apotheker didn't even last a year and got $13.2M in cash and stock options. We can debate the true value of the package because of the nature of the stock options, but anyone who is not a CEO who does a crap job gets F-I-R-E-D. Guys like former Pfizer CEO Hank McKinnell shouldn't be receiving $200M to leave a company whose stock price dropped 40% during his 5 years. 

Yes, there were legal obligations in his contract, but those contracts are often part of a rigged system. Boards are often filled with former CEOs who have a vested interest in keeping CEO pay high. 

I'm a big sports fan, so there's plenty of discussion on overpaid people and whether someone is worth $70 or $80M. It's a valid question for athletes, but even moreso for many awful CEOs who do poor jobs. In the case of McKinnell, I could do just as awful a job for $1M a year and save the company hundreds of millions of dollars.


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## Spidey (May 11, 2009)

Past a certain point, it's more about ego than worth. I believe that Warren Buffett takes a salary of about $500,000 per year.


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## donald (Apr 18, 2011)

I agree with the ego thing,you would think some of these leaders would scale down,esp in economic down times.(founders of companies are usaully not foucsed on money)

The sports world is ridiculous also,thou the pressure and stress that would be invouled would be nuts!I sometimes wonder how "they" ceos do it.I run a small business(very small in the grand scheme)and couldnt imagine what it would be like running a corporation of magnitude.


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## canehdianman (Apr 7, 2009)

ghostryder said:


> He didn't actually get $33M. He got ~$6M in salary. the rest is in stock options etc. If the company does well he does well. If not.....
> 
> (hypothetical numbers):
> 
> ...


The value of stock options is not a straight-line valuation. The value of stock options issued to executives is calculated using the Black-Scholes method. The numbers will be found in the summary compensation table in the Executive Compensation section of the Company's Information Circular. (this is for a publicly traded company)


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## houska (Feb 6, 2010)

Business management is like sports and entertainment (movie stars, top singers) in this regard. If you look at individuals and what compensation they receive, you're pretty often left scratching your head. However:

a) These positions are the pinnacles of careers that require a sustained mixture of talent, dedication, drive, and luck in order to get there. The compensation at the top needs to motivate the army coming through the funnel to make the sacrifices. I lived in some dodgy surroundings in Chicago for a few years, and the salaries of top basketball players in the NBA were a key motivator for the local youths who spent every waking hour throwing hoops. My friends who practiced violin for 6 hours per day were maybe less motivated by $$$, but highly motivated by the glory and adulation top soloists receive. Likewise, you need the megabucks at the top of the corporate ladder to motivate young capables to borrow tens of thousands to go get MBAs, and the ladder-risers to continue to work long hours, put up with lots of stress, etc. to keep going. You could try spreading the same total pool more equitably, but the lottery approach/true reward if you make it to the very top seems to work better...

b) Actual performance in these positions is heavily influenced by luck, by externalities, and by highly individual personal fit. Every individual who is courted for these positions is highly conscious of that, and wants some of the upside as well as downside protection. That's why they insist on - and get the sorts of promises of golden parachutes that can then be galling if the performance is not up to par. But human risk aversion being what it is, and since these individuals always have other options, this is hard to fix. Those whose personal risk tolerance is higher end up going the Private Equity or hedge fund track rather than corporate management to CEO.

(Disclaimer: I learned in primary school that I didn't have distinctive sports abilities, in university that I didn't have distinctive musical abilities, and after a few years in the corporate management world that I didn't actually want to move up the corporate ladder.)


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## ghostryder (Apr 5, 2009)

canehdianman said:


> The value of stock options is not a straight-line valuation. The value of stock options issued to executives is calculated using the Black-Scholes method. The numbers will be found in the summary compensation table in the Executive Compensation section of the Company's Information Circular. (this is for a publicly traded company)



You completely missed the point, didn't you?

The press reports "CEO of ABC corp got $50million in pay" and people like the OP seem to think that is cash in his pocket, when in reality it was $5million in salary and the rest was in options, restricted stock units etc that MAY OR MAY NOT be worth anything, when and if they are exercised. Their theoretical "value" according to Black-Scholes doesn't mean much if Mr. CEO never exercises the option.

If Mr. CEO got paid $1 in salary and $50M in options at a exercise price of $50/share, and the price of the shares on the open market is $50/share when Mr. CEO exercises the option and immediately sells, how much was his compensation?

It sure isn't $50M.


$30million worth of options mean zero in the pocket of Mr. CEO if the option is never exercised.

If you were a CEO would you buy $30million worth of stock at an exercise price of $50 if the current share price was $25? I think not. No one in their right mind would pay $50/share when they could simply buy on the open market for half that.


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## andrewf (Mar 1, 2010)

If someone paid you in lottery tickets, would you say you're not being compensated at all if you didn't win?

A lottery ticket has a certain 'expected' value based on probability. It is the same for stock options.


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## canehdianman (Apr 7, 2009)

ghostryder said:


> You completely missed the point, didn't you?
> 
> The press reports "CEO of ABC corp got $50million in pay" and people like the OP seem to think that is cash in his pocket, when in reality it was $5million in salary and the rest was in options, restricted stock units etc that MAY OR MAY NOT be worth anything, when and if they are exercised. Their theoretical "value" according to Black-Scholes doesn't mean much if Mr. CEO never exercises the option.
> 
> ...


Calm down, Sparky.

I was agreeing with you and answering another poster's question about where to find CEO compensation.


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## Square Root (Jan 30, 2010)

Most of the big CEO comp numbers result from the CEO cashing in several years of options in the year reported. This is actual cash received. The disclosure of Option comp numbers for the current year's award use a Black Scholes type valuation method which may or may not result in the ultimate receipt of cash. In my case the actual cash outs always greatly exceeded the valuation assigned when I received the option awards. Obviously in a bad market extending for many years, this may not be the case.


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## kcowan (Jul 1, 2010)

Stock option compensation is poorly understood by nearly everyone. And LTC schemes tend to balloon when the executive is in it for the long haul and does not cash them out regularly.


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## cannew (Jun 19, 2011)

No!, No!, but so are Sports salaries, Movie Stars, TV, and many others. If the market is willing to support them, then there is enough money generated for them to demand the salaries they receive.


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## Eclectic12 (Oct 20, 2010)

cannew said:


> No!, No!, but so are Sports salaries, Movie Stars, TV, and many others. If the market is willing to support them, then there is enough money generated for them to demand the salaries they receive.


Are you saying that the "market" determines the CEO's salary?


Hmmm ... I sit on the compensation committee for the company you are CEO for and vote on your compensation. You set on the same committee for the company I'm CEO of. It's good that the "market" has all of the influence ... *grin*



Cheers


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## donald (Apr 18, 2011)

I think sports is slightly different,tiger woods when healthy and playing drives nearly the economic engine of the sport,tv revenue,sponsors,venues,the ability to reach global,same with jordan in his prime ect,hard to agrue against it,same in movie,tom cursie or hugh jackman or whoever.They deliver instant results in box office sales ect.

From an outside view of ceos(and i might be completely ignorant here)a ceo can underperform for a considerable streach,ultimetly if he fails the company he will in the long term not be able to duck and cover but it seems like there is a bit of a wide bearth re; results.


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## slacker (Mar 8, 2010)

In a theoretical free market, the price of labour like anything else is determined by supply and demand.

But the market for CEO labour is anything but free. You have buddies sitting at the board, rigging up the system, inflating salaries to no end. (The cycle of revolving door continues, when CEO's serve as board for other companies) Meanwhile, stockholders rarely pay due diligence and complain about the CEO compensation structure.


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## kcowan (Jul 1, 2010)

slacker said:


> Meanwhile, stockholders rarely pay due diligence and complain about the CEO compensation structure.


Stockholders lack the voting power to change the system. They get the chance to vote on it once a year.


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## Eclectic12 (Oct 20, 2010)

kcowan said:


> Stockholders lack the voting power to change the system. They get the chance to vote on it once a year.


Hmmm ... more like shareholders get a chance to lobby to put a vote on the agenda. If the minumum requirements ar met and it makes it onto the proposal agenda, like some of the Canadian bank shareholder items, the likely management response is "it's a free market that requires compentative compensation that the independent compensation committee reviewed and has approved - for this and other reasons management recommends voting against this proprosal".

Just like on some of the company buyouts, the independent party reviewing the buyout price "approved" the offered amount as "fair" in the press release. Yet careful reading of the fifty plus page offer uncovers appendix 4 of buyout price discussions. Spread across five pages is the ten "discussions" which starts with "the offer is fifteen dollars too low based on comparable companies" and ends with "it's still too low but at least the offer has been increased by $2".

It's interesting what discrepencies are available just by reading the materials mailed out.

Cheers


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## KillahK (Oct 14, 2011)

I think that as long as you are not the CEO of a company that has recieved tax dollars to bailout, you should earn what you are worth!


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## andrewf (Mar 1, 2010)

KillahK said:


> I think that as long as you are not the CEO of a company that has recieved tax dollars to bailout, you should earn what you are worth!


We should not bail out companies! We should let them restructure.


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## Eclectic12 (Oct 20, 2010)

KillahK said:


> I think that as long as you are not the CEO of a company that has recieved tax dollars to bailout, you should earn what you are worth!


That's the discussion ... while the $210 million includes more than just cash, is anyone worth a severance of this magnitude?

http://insight.kellogg.northwestern...le/are_large_ceo_severance_packages_justified


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