Two Things That Have Nothing To Do with Each Other

Data from Equilar (methodology), published by The New York Times:

compensation

I know this is simplistic, but I just couldn’t resist.

Some caveats:

  • Stock total return is a poor way to measure CEO performance – yet it’s the one that CEOs and boards commonly point to to justify compensation.
  • A CEO may have been granted a large stock award in 2008 as a reward for “good performance” in 2007. This could explain the combination of high compensation and poor 2008 performance. However, just think about what that means for a second.
  • Most of the large compensation awards are largely restricted stock or stock options. These were valued as of the data of the grant, so if the company’s stock price later fell, the CEO is unlikely to realize the calculated value of the award. But imagine if the stock price had gone up instead: the CEO and the board would be insisting that the award should be valued as of the grant date, not the later exercise date (when it would be worth much more).

Also, I excluded a company called Mosaic, because it’s total return was 257%, so it packed all the other companies into one side of the chart. Mosaic’s CEO earned $6 million.

Update by request: With a log scale.

compensation-log

I had actually already done this chart, so it was an easy request. I’m not sure a log scale is inherently better given the spread of the compensation data; as you can see, now the outliers are on the low end, even when you code people like Steve Jobs (compensation = $1) as $0.1 million. But the story is still the same.

By James Kwak

32 responses to “Two Things That Have Nothing To Do with Each Other

  1. Pingback: CEO compensation « Gauti

  2. Hey Econ Geeks:
    Off topic question:
    I’ve been following this site for a couple months now. You folks have done a great job explaining what’ going on with the economy in a way accessible to laymen. You’ve also raised many important questions about our government and their response to the crisis.

    What can individuals do to help influence and change things toward a better economic future?

    thanks
    Greg

  3. Carson Gross

    BWAHAHAHAHAHAHAHAHA!

    That is the LOLdiest chart I’ve seen all year, and that includes inflation adjusted housing prices (punchline: still 20/30% overvalued.)

    Cheers,
    Carson

  4. Glad to make you happy, Carson.

  5. Pebble11216

    I think it would be interesting, even if also simplistic, to see this, and related, data in a couple of other ways. First, it might be neat to see change in CEO compensation plotted against change in revenues. Eyeballing the figures from the NYT indicates a possible, if slight correlation, suggesting compensation dropped along with revenues.

    Second, maybe it would be worth looking at CEO compensation expressed as a percentage of revenues, versus change in revenues. This would give one a feel for a how to compare a firm’s resource allocation to others’ as its revenues change.

    Thanks for the interesting, even if simplistic, plot.

  6. Please consider a log-spaced axis for the compensation axis — there still may be nothing there, but the most extreme values prevent one’s eye from seeing any possible trend in the bulk of the data.

  7. Gerald McInvale

    I certainly do not defend the compensation packages of CEO’s – they’re almost as ridiculous as professional athletes, entertainers, etc. However, the frame of the analysis is not very good in that it mixes stock sales and multi-year performance measures with single year measures and then compares it to a single year metric of shareholder value. As it was pretty clear that the economy was deteriorating by mid 2008, it is probably clear why certain CEO’s chose to divest themselves of stock holdings. It would have been more more useful to do a multi-year analysis – say for 4 years ending with 2008. The compensation packages would still have been excessive, but the analysis would have been more valuable.

  8. Thanks for producing this chart. Could you provide data labels for the two companies with approx 65% and 78% total return at relative low CEO compensation amount? they seem to be all alone up there.

    Also, could you post the datasets used to create this? Could be interesting to factor in market cap for these companies too.

    thanks, i’m enjoying this blog.

  9. “Sweet”

    But surely people are paid what they are worth. LOL.

  10. So that’s how Motorola got driven into the ground.

  11. Pingback: Executive Compensation And Unemployment | Mark Cuban’s Proposition – Frog Blog

  12. Since it is appropriate to analyze CEO compensation, how about analyzing the inability of government to adjust the minimum wage. Minimum is set by legislation…CEO gets what he wants affirmed by the the boards lack of spine.

  13. Why didn’t you publish this while I was still studying?

    I took the core course on screwing the shareholder, but didn’t take the elective on making millions while doing it.

    And now I am reduced to writing comments :(

  14. Saket,

    Western Digital = +78%
    Monsanto = +65%

    http://projects.nytimes.com/executive_compensation

  15. Hi James and Simon,
    Thanks so much for such a dynamic and wildly educational site. I read you every day. Thought I’d give something back (promise I won’t make a habit of this) in the way of a laugh for you:

    Kate

  16. I’m fairly new to your site, so am wondering if you discuss other factors that go into determining CEO compensation. It seems that executive compensation has edged into the stratosphere lately – in the early 1990s, CEOs in the U.S. were paid roughly 140 times more than the average worker. About a decade later, they made approximately 500 times more. Are we getting that much more bang for the buck these days? Seems not….

  17. While I personally agree that the compensation packages of athletes, entertainers are ridiculous compared to the average worker, – the wildly disproportionate incomes of corporate CEO’s dwarfs those of athletes and entertainers. How many athletes or entertainers are on Forbes illustrious list?

    Further, athletes and entertainers provide real accessible products and services and their efforts exist in time and space. We can all relish in their glories and look back in the future and appreciate the great work accomplished on the field, or in the theater, on on the screen or in various physical artforms. What do finance CEO’s leave us? Nothing but PONZI scheme’s. Here one day, gone the next.

    All these oligarchs and predator class swindlers and thieves accomplish is manipulation of numbers and false values for their own singular profit. They create NOTHING. They leave NOTHING! They leave no measurable service or product benefiting or accessible society at large. They contribute nothing to the improvement of life on earth. They leave no fixed product, no machines or technologies, no systems, no worthy philosophies to enhance or improve the peoples lives. They invent or create, or offer no effecient systems for increasing the wealth of society at large, or the other 99% of the population who are not superrich. They create nothing but fictional values, complex PONZI schemes, paper wealth that the predator class alone are privy to accessing, recognizing, and offshoring. The predator class leaves nothing but debt, deficits, and devastating costs obdurately hoisted on the shoulders of our children.

    Imponderable wealth is majikally conjured out of the myst through collusion, criminal enterprizes, financial malfeasance, perfidy, and fraud – and recognized or appreciated one day and funnelled into the offshore accounts of the predator class swindlers and thieves on Wall Street – and then majikally deleveraged or, unwound, or disappeared the next day, – (minus untold billons illicitly whisked away into untouchable offshore accounts) and majikally returned to the myst from whence it came.

    Crimes were done. Fraud, malfeasance and perfidy are systemic and endemic. Crimes, fraud, and financial malefeasance and perfidy are being perpetrated today without restraint, and all these pretty analytical discussions excuse the FACT and TRUTH, that the oligarchs, the predator class swindlers and thieves are ruthlessly robbing and pillaging poor and middle class Americans to feed said oligarchs and said predator class swindlers and thieves. Worse these obdurate, heartless, predator class criminals, swindlers, thieve mercilessly heap all the mosterous debts, risk, burdens, pain, suffering, and imponderable costs on the shoulders of America’s poor and middle class children.

    Many of us will not go to the flame or the dungeon, or the debtors prison silently or peacefully. In a world where there are no rules – there are no rules for anyone.

    There will be blood, a reckoning, and a balancing.

    (I read your “be nice” rules, – but a rose is a rose, a pig is a pig, and PONZI scheme swindlers and thieves are PONZI shceme swindlers and thieves, and I will not compromize the TRUTH or FACTS to conform to your niceties and ignore the rank CRIMES, FRAUD, COLLUSION, MALFEASANCE, PERFIDY and grotesque abuses of the predator class swindlers and theives on Wall Street.) Delete my commentary if you will, but you will do nothing to temper the seething unrest percolationg in the hearts and minds of Americans who are suffering grieviously while the predator class robs us blind.

  18. HERE IS ONE LITTLE IDEA: SUSTAINED OUTRAGE REPRESENTED IN REGULAR, OBSESSIVE LETTER WRITING TO OUR NON-REPRESENTING ELECTED OFFICIAL REPRESENTATIVES…that’s all i know to do.

    I hope you will get more ideas Greg- I’d like to know too!

  19. Great chart-:) – and here is a response from an FT article – “Some banks have warned that the “Pay for Performance Act of 2009” recently passed by the House of Representatives would diminish their appetite to take part in government financial rescue schemes because it would impact their ability to pay top management” – same old story-:)

  20. Was this just a nicely deft backhanded way of pointing our attention to Mosaic (Cargill/IMC Global Phosphates & Potash powerhouse)?

    There’s been a lot of fertilizer going around on the blogs the last few years, so it makes sense. Don’t they make bombs out of that stuff too? If so, what percentage of it goes to agriculture/other and what percentage to manufacturing weapons?

  21. Pingback: Vil den sidste bastion ogs falde? - Boligdebatten.dk

  22. So, what *is* CEO compensation correlated with?

    How about market capitalization? Or, gross income?

    Or, number of board members who went to college with the CEO?

    There has to be something which sets the magnitude of compensation for CEOs, and if it’s really nothing more than market capitalization, then CEO compensation is just a tax.

  23. Paris Biltong

    What I’d like to know is whether there were retention bonuses during the Great Depression. Why would you want to pay people bonuses to stay in their job when jobs are vanishing like snow in the sun and those people have nowhere to go? Is anyone hiring away AIG senior executives? Are the bonuses intended to keep them from jumping out windows? Perhaps.

  24. I’m not an econ geek, but one thing I’m going to do is to show up at a demonstration sponsored by “A New Way Forward” on Saturday, April 11 at 2 pm – a number of U.S. cities will have one. Bill Moyers and William Greider mentioned this group in their discussion on Moyers’ March 27 show – Greider is an advisor to and sponsor of the group.

    http://www.anewwayforward.org/the_idea/

    Their aims are:

    “NATIONALIZE: Insolvent banks that are too big to fail must incur a temporary FDIC intervention – no more blank check taxpayer handouts.

    REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.

    DECENTRALIZE: Banks must be broken up and sold back to the private market with new antitrust rules in place– new banks, managed by new people. Any bank that’s ‘too big to fail’ means that it’s too big for a free market to function.”

  25. “Retention bonuses” are not actually used to retain “key” employees. Rather the self-selected “key” employees dreamt up the notion of “retaining key employees” as a pretext for taking as much as the they could while the taking was good and tying a nice “contractural” bow around it. It’s revolting.

  26. Pingback: The Performance Debate « Patterns of Work

  27. Smorgasbrot

    I always wonder why CEO pay is regarded as variable or incentive based. It is not! It is a “sunk” amount: promised in advance and not under control of the CEO himself. His pay package is a mere lottery ticket that won’t change his behavior or performance.

    Simple econ theory on incentive pay shows that Pay is a function of some measure of output (Q), be it sales, or profit or what have you more. Output then is a function of effort (E) and good/bad luck (u):

    In short Pay = F(E, u)

    To make incentive pay work, output (Q) should be measured verifiably and unambiguously. Also, ideally, one should not reward a CEO for just being lucky, or punish him severely if something really bad happened to him (e.g. incurable disease) that screwed up his performance. So, one should be able to distinguish effort from good/bad luck to some extent. These are some simple assumptions that make incentive pay work, in theory, that is. But still, I think these assumptions make sense.

    The thing is, CEO output cannot be measured, neither can it be related to either effort or luck. Yep: some basic conditions that should make incentive pay work do not exist in the corporate world. CEO’s received massive pay for output that cannot be measured. They also received pay from executive options and shares that happened to have a high value for a reason far beyond their control (that is luck, and we don’t want to reward CEO’s for just being lucky).

    Interestingly, output can be measured at simple jobs: sex-work, door-to-door sales, bounty hunters, lap-dancers, selling ice-creams. Isn’t it bizarre that CEO’s receive incentive pay and in doing so put themselves on par with prostitutes?

  28. Um, the point isn’t excessiveness of compensation. The point is that compensation is unrelated to performance.

    BTW, James it would be nice to add a regression line with coefficient and t-statistic to the log-log chart.

  29. adios amigos

    Tony,
    I believe that most clear thinking people feel exactly as you do. While there is no longer any doubt that everything you referenced above is clearly true, what’s the solution? I feel these people no longer have any fear – none. They certainly don’t fear the courts, because they rarely end up being prosecuted. I believe that this last bomb was deemed to be “to big to be prosecuted”. I actually believe thats the current philosophy. Besides, what are you going to do? Lock up every person in the mortgage business for the last 5 years? Won’t happen. Besides, remember, what they were doing wasn’t illegal. Immoral, yes. Illegal, no. So, focus your outrage on your elected officials. They clearly were in the pocket of “big finance”. No doubt about it. Can you say Chris Dodd?
    AA

  30. adios amigos

    Smorg,
    Should a guy that bolts a fender on a Chevy at some factory in Detroit get paid $60 per hour?
    I think perhaps not, as that scenario didn’t work either.
    AA

  31. Pingback: Frontrunning: April 8 | Bear Market Investments

  32. Norman Augustine said best in his book Augstine’s Laws:

    “There are many successful businesses in the United States. There are also many highly paid executives. The policy is not to intermingle the two.”