A Weak “Defense of the CEO”

By James Kwak

I finally bit the bullet and read “In Defense of the CEO,” Ray Fisman and Tim Sullivan’s article on the cover of the “Review” section of Saturday’s WSJ. The inside continuation page is headlined “When CEOs Are Worth a Fortune.” In fact, I read it twice. But nowhere could I find any evidence or even an argument that any CEOs are worth a fortune—just a lot of implying, assuming, and asserting that they are.

Fisman and Sullivan discuss what CEOs do: they go to meetings, which is no surprise. They cite one study saying that CEOs who spend more time meeting with employees run companies that are more profitable than CEOs who spend more time meeting with external parties. But they don’t discuss which way the causality runs, or whether the latter companies would do better with the former CEOs. They make the conceptual argument that “a slight edge in ability can translate into enormous payoffs,” which might justify high CEO pay—if only they provided any evidence that ex ante higher pay packages actually correlate with ex post higher shareholder returns. And they repeat the stock argument that golden parachutes give CEOs an incentive to sell out at high prices rather than dig in and fight off takeovers—but the only study they cite argues that golden parachutes are associated with lower company valuations.

Mainly what they do is name-drop CEOs of successful companies (or at least with successful tenures)—Amazon, Apple, Zappos, EasyJet, Ford—without bothering to argue that those CEOs were responsible for their companies’ success. In a couple of cases it’s hard to argue with the importance of the CEO, but simply repeating Steve Jobs’s name over and over is not going to convince anyone that the average CEO is Steve Jobs.  Three of their five examples, by the way, founded their companies, which makes them far different from the typical hired mercenary with an obscene employment agreement.

This is the best the WSJ can find as an argument for paying oodles of money to CEOs?

38 thoughts on “A Weak “Defense of the CEO”

  1. The book from which this article is excerpted [The Org] does a better job of explaining Fisman and Sullivan’s argument. They have a lot of anecdotal evidence for the claim that the implementation of corporate innovation can’t rely on the serendipity and good will of inventors but requires a well-managed organization that tests the wisdom of proposed innovations according to spatial and temporal qualities of appropriateness for the market and then tasks and supervises employees to do the hard work of transforming innovations into products. Within this framework, CEOs have the hardest job because they have to be able to draw upon and make practical both vision within, and dedication to, the workplace.

  2. An Editor (Lindsey Turrentine) who stands for her “publication” buckles her knees under the first bit of pressure from CBS corporate.

    Question: How credible is Lindsey Turrentine’s promise after her knees buckled under the first sing inkling of pressure of CBS corporate, that she wouldn’t kill any similar situation when they vote in the “CNET trailer”???

    Answer: If I was Dish Network (or ANY company offering the best DVR in the marketplace) I wouldn’t bet my next 6 months sales revenues on Lindsey Turrentine’s word, or CBS’s journalistic integrity.

    Well, like Jimmy Swaggart AFTER he got caught with his pants down at the hotel, http://archive.people.com/people/archive/jpgs/19880307/19880307-750-35.jpg
    ….Miss Turrentine is really “sorry” she muffled her “unbiased” writers, and she “would not quit” (what a “heroic” woman)….. And at the end of her weak I’m “so sorry” I got caught explanation, she has a little smiley photo of herself, so we know she wouldn’t LIE.

  3. Moses Herzog calm down! Why is everyone screaming about integrity when it is adverts that effectively pay for most of their salaries? The Dish is a huge blow to CBS revenue model. If advertisers realise that nobody watches their adverts then the revenues will fall. Of course CBS sees the Dish as their enemy and don’t wish CNET to publicise the product. Nobody likes adverts and we all want to skip them (I do on my Tivo) but half the planet relies on the revenues. I quite understand both sides of the argument but when CBS pays the piper they can call the tune.

  4. Take a large corporation, which is an autocratic organization with vast resources. Give control to someone who mainly knows about maneuvering for power and money, but who may have few skills relevant to the specific business. Let him even control the board that is supposed to check him. Give him perks enough to spend much of the time at leisure in his several residences, not really working. Give him compensation so big that it affects the corporate bottom line, and so loaded with legalistic gimmicks that the CEO will be immensely rich no matter what happens to the company. Make everyone in the company defer to him. He is known by his first name, like a king. Ordinary people can’t even speak to him, but he gets the credit for everything they accomplish. If the company grows profitably, it’s because he did it. If not, he can always close branches and fire large percentages of employees, presumably because they all undermined his great mission.
    Unleash all this and expect a good result.

  5. All it takes is to be the biggest and best bullshitter around, forget talent, and you too can make it to the C-level.

  6. Forget the grading system, (since we all know education in this country is a joke).
    But don’t forget that we are still the biggest, baddest, bunch o nuts around.

  7. Dear James:
    Thanks for your interest in our article. I’d like to make a few observations about your comments. Most importantly, we do not want our article to be seen as a blanket endorsement of high CEO pay. We try to be clear on that in the opening, though many have interpreted it in the same way you have.

    More substantively, I’d like to comment on the evidence we present. We cite Bebchuk’s work not because it was the academic evidence most sympathetic to CEOs (I had no trouble finding half a dozen endorsements of high severance pay in less than a minute on Google Scholar). Rather, we tried to find what we felt was the most well-identified and contemporary research. Bebchuk et al does lean towards a value-destroying view of golden parachutes. But it does document the upside as well. Hence our comment that golden parachutes shouldn’t necessarily be eradicated, but rather more carefully designed.

    You are correct that we do mention successful CEOs, which is natural for an article on why good CEOs are worth it. But I do take issue with your comment that these are mostly founders as a reporting bias. There is plenty of evidence that many founder-run companies under-perform, so you can spin that point both ways.

    Overall, though, our main objective was to give people a view of what CEOs do, what makes a good one, and why – in superstar economies – shareholders might be willing to pay such high compensation.

    Best, Ray Fisman

  8. Yes, I think there are CEOs who are worth their pay. And the ones that I have liked were the ones who kept in touch with the employees. But depending on what is going on outside, that may not be the area where the CEO is focusing.

    But I have great difficulty with a CEO compensation package where he/she can lose money or even drive the company to bankruptcy and still get a bonus.

    I think one thing that has been lost is basic morality with many CEOs. When they get to the top, they begin to see the company as a device for lining their pockets rather than a device for returning value to the shareholders and customers.

    The Canadian Courts just aquitted 3 top executives of Northern Telecom who had cooked the books to increase their bonuses. It could not be proved beyond a shadow of a doubt, so they can live in luxury the rest of their lives while thousands of their pensioners are dealing with a bankrupt pension fund. They should not be able to sleep at night. One of them (Frank Dunn) lives on an estate in a house that looks like a castle and he sleeps just fine.

  9. I think one of the best antidotes for amnesia is jail time.

    George Bush went after the executives at Enron. Kenneth Lay had a heart attack during prosecution. Jeffery Skilling us still behind bars.

    But none of the executives from Standard & Poor or Moodys have gone to jail. I don’t fault the banks I fault the Credit Rating Agencies. They knew the billion dollar bundles held sub prime mortgages with no prospect of performing and they rated them AAA.

    Barack Obama has done some good things in his presidency but I think his legacy will be that he and his buddy Timothy Geithner let the crooks behind the subprime mortgage collapse get away.

  10. Its a jail where they earn millions per year even though their incompetence has been proven. They should at least be out on the street looking for real jobs instead of sitting in their corner offices doing nothing.

  11. Good for Fisman and Sullivan if they have actually managed to delude themselves into thinking that their article was thought provoking. Do perks serve as incentives? Erm, actually maybe not. Take a look through Goleman’s work and you’ll find that the effects of excessive perks are transient.

    “Excessive, decadent? That’s a hard call to make without having some idea of what a CEO does.” It’s actually not a hard call to make. Fisman and Sullivan are leaving out the crucial importance of magnitude. High pay and some nice perks might be well deserved by most CEOs. But 30, 40, 100 million dollars… That is unquestionably excessive and decadent. Maybe from a cold, economic standpoint that is what it takes to get a top performing CEO. But that’s a different question.

  12. I agree with the comment left here by Joseph. James Kwak mentions some methodological problems with the WSJ article. such as not being clear about causality in the examples cited by the authors. But it is the magnitude of the pay packages that is a development that needs to be scrutinized. What is the role of the outside directors who are part of an inside network in approving the compensation? The role of compensation boards who also have a vested interest in keep multiplying the numbers? Isn’t their a class interest in protecting the high pay of CEO’s and high level executives?

  13. Chief Executive Offenders (CEOs) are the sociopaths of business, where morality is not what is good or bad, but good business and bad business as practiced for profit.
    Perhaps the refinement of this category may well be narrowed down by separating the self-made pirate from the Harvard and other Ivy league MBAs.
    There are undoubtedly a great many good intentions among CEOs, but only a handful are virulent reptiles. Still, the average CEO does look up to these, and their are so few who stand up and criticize the giant squid. Afterall, the ethics are based upon the morality of good and bad business; not good and bad people. The problem is that no one HUNG the first person that ever said “…it’s only business…” and that is a damn shame!

  14. http://www.commondreams.org/view/2013/01/16-0
    Published on Wednesday, January 16, 2013 by Creators.com
    Who’s Behind “Fix the Debt”?
    by Jim Hightower

    Look out, the “fixers” are coming.
    “…top corporate chieftains and Wall Street gamblers want to tell Washington how to fix our national debt, so they’ve created a front group called “Fix the Debt” to push their agenda. Unfortunately, they’re using “fix” in the same way your veterinarian uses it — their core demand is for Washington to spay Social Security, castrate Medicare and geld Medicaid.

    Who’s behind this piece of crude surgery on the retirement and health programs that most Americans count on? Pete Peterson, for one. For years, this Wall Street billionaire, who amassed his fortune as honcho of a private equity outfit named Blackstone, has runs a political sideshow demanding that the federal budget be balanced on the backs of the middle class and the poor. Fix the Debt is just his latest war whoop, organized by a corporate “think tank” he funds.”

    “This time, Peterson rallied some 95 CEOs to his plutocratic crusade, including the likes of General Electric boss Jeffrey Immelt and Honeywell chief David Cote. (Note: Both Immelt and Cote, while cheering for cuts to programs that we working Americans pay into, are themselves taking money hand over fist from taxpayers in terms of military contracts and corporate subsidies for their corporations. But they aren’t concerned about defense spending and ending subsidies that benefit their bottom line.)

    All of them are not merely “One Percenters,” but the top one-tenth of One Percenters. Of course, a group of pampered, narcissistic billionaires would not make a credible sales argument for this dirty work. Having elites piously preach austerity to the masses would be as ineffective as having Col. Sanders invite a flock of chickens to Sunday dinner.”

  15. Published on Monday, January 14, 2013 by Common Dreams
    The Five-Step Process to Cheat the Middle Class Worker
    by Paul Buchheit
    #2: Build up a financial industry that has no maximum wage.
    This is where the money is. In 2007, before the financial crisis, a Harvard survey revealed that almost half of the school’s seniors aspired to careers in finance. The industry’s share of corporate profits grew from 16% in 1980 to an astonishing 45% in 2002.

  16. “Despite a lot of noise from shareholders and a few victories at big names like Citigroup and Hewlett-Packard, executive pay just keeps climbing.”
    “…. rewards at the top are still rich — and getting richer. Now that 2011 proxy statements have been filed, the extent of executive pay last year has finally become clear. Median pay of the nation’s 200 top-paid C.E.O.’s was $14.5 million, according to a study conducted for The New York Times by Equilar, a compensation data firm based in Redwood City, Calif. The median pay raise among those C.E.O.’s was 5 percent. (The full list is available here.)”

  17. Executive Excess 2011: The Massive CEO Rewards for Tax Dodging
    Executive Excess 2011: The Massive CEO Rewards for Tax Dodging

    By Sarah Anderson, Chuck Collins, Scott Klinger, Sam Pizzigati
    CEOs rake it in while their corporations dodge taxes.

    Read the full report, Executive Excess 2011:
    The Massive CEO Rewards for Tax Dodging.http://www.ips-dc.org/reports/executive_excess_2011_the_massive_ceo_rewards_for_tax_dodging

    Read our response to critiques of our methodology: A Response to Disputes by Corporations over our Methodology

  18. Published on Thursday, January 17, 2013 by Common Dreams
    Corporate CEO ‘Extremists’ Target Social Security, Medicare
    ‘For the wealthy, pampered, and narcissistic CEOs of the Business Roundtable, sacrifice is always for someone else.’
    – Jacob Chamberlain, staff writer
    “CEOs from America’s largest corporations—including its biggest banks, retailers, and insurance companies who helped drive the country into the worst recession in nearly a century— are now calling on Congress to punish the nation’s working class and society’s most vulnerable by advocating major changes to Social Security and Medicare in a new lobbying push that critics say reveal the cruelty and selfish nature of the country’s corporate class.”
    Among the other 200 corporations, Roundtable members include American Express, AT&T, Bank of America, Bayer, Chevron, Conoco Phillips, Dow Chemical Company, and JPMorgan.

    “Average CEO pay for S&P 500 companies is nearly $13 million,” Garofalo adds. “Recent increases in life expectancy have only benefited wealthier workers in non-physical jobs. Poorer workers doing physical labor have not seen the same gains and would be most hurt by an increase in the retirement age.”

    And as Eskow concludes: “for the wealthy, pampered, and narcissistic CEOs of the Business Roundtable, sacrifice is always for someone else.”

  19. http://en.wikipedia.org/wiki/Business_Roundtable
    The group is called President Obama’s “closest ally in the business community.”[6]

    The Business Roundtable played a key role in defeating an anti-trust bill in 1975 and a Ralph Nader plan for a Consumer Protection Agency in 1977. And it helped dilute the Humphrey-Hawkins Full Employment Act. But the Roundtables most significant victory was in blocking labor law reform that sought to strengthen labor law to make it more difficult for companies to intimidate workers who wanted to form unions. The AFL-CIO produced a bill in 1977 that passed the House. But the Roundtable voted to oppose the bill, and through its aggressive lobbying, it prevented the bills Senate supporters from rounding up the 60 votes in the Senate necessary to withstand a filibuster.

    In fiscal policy, the Roundtable was responsible for broadening the 1985 tax cuts signed into law by Ronald Reagan, lobbying successfully for sharp reductions in corporate taxes. In trade policy, it argued for opening foreign markets to American trade and investment. The Omnibus Trade Act of 1988 reflected the thinking of the Business Roundtable. In 1990, the Roundtable urged George Bush to initiate a free trade agreement with Mexico. In 1993, the Roundtable lobbied for NAFTA and against any strong side agreements on labor and the environment. It provided the money and leadership for the main pro-NAFTA lobby.

    The Roundtable also successfully opposed changes in corporate governance that would have made boards of directors and CEOs more accountable to stockholders. In 1986, the Roundtable convinced the Securities and Exchange Commission to forgo new rules on merger and acquisitions, and in 1993 convinced President Clinton to water down his plan to impose penalties on excessive executive salaries.”

  20. Software companies are rather different on multiple levels. This site (as this is something James Kwak has high degree of knowledge on) has commented often on the likes of Groupon and Facebook, and it seems there is a certain level of dishonesty with shareholders that comes from these companies. I think similar to the banking industry there seems to be a certain shroud of mystery involved which lends itself to corruption, or at minimum, a degree of misrepresentation.

    I have invested in software companies more than once and done amazing well (probably more out of walking a$$ backwards into shear luck than any real competency on my part). Certain things again lend themselves to lies, for example there is more “leeway” given in accounting standards as to how software companies “capitalize” expenses as the software is being “developed”. This is one thing I know I keep a strong peripheral eye on when I invest in software companies. I “advise” (though this is not investment advice) others who may be thinking of investment in software industry to do the same. Also “Goodwill” (as an accounting term) is something very hard to measure quantitatively in software industry.

    Lastly, does the company put any thought into customer service AFTER the sale?? This is strongly true in software and technology fields in general that they pay “lip service” to customer service, but very rarely give a flying crap after they’ve gotten their money from the sale. If you find a software company that makes a tangible and concrete effort on customer service AFTER the sale more often times than not you’ve found a long-term winner.

  21. Speaking as a CEO (of a software company) I have a different perspective on holding the position (I came through the technical side of the house). What I do as the CEO is, basically, to drive down into the organization a direction and policy. I manage the executives, and make sure that what they do reflects the agenda that I set, and give them ample opportunity to help set it. After that I am the biggest cheerleader of the company, and the biggest networking agent for it. I motivate the troops, and course-correct strategy.

    Am I responsible for the success of the company? I’m part of it, but everyone determines the success. I can help if my strategies are right, I can help if my initiatives are good. I can hurt if they aren’t or the organization doesn’t support me. There is no magic to what I do, other than the sheer force of my personality or will and the ability to learn from my past. Do I deserve an outsized salary? Certainly not. I deserve compensation if my ideas work, and the door if they don’t. That’s the arrangement I have in my current position. I get a market salary and upside if we do well proportionally to how we do. That’s the way it should be. An interesting question…why is it that you’re questioning CEO salary only? Do ball players deserve salaries that are more than a CEO? Do actors? Do authors? Musicians? Most of them make more than I ever will. So why all the fuss about CEOs? I think it’s a far deeper problem than just the business world.

  22. So you’re a lone ranger….A. With few places left to hide you say,……Well,
    don’t bother switchin him, he’s got a hide on him 3/8 inches thick, won’t do any good Jed. Send him out to wood shed, have him and Jethro go at it with the 6 inch ax.

  23. You are right in that the problem is more pervasive than the grossly high pay of CEOs. But there is some explanation for the athletes and actors – only a few at the top – earning huge incomes. Their talents are in short supply, so they earnwhat economits call economic rent due to natural scarcity. Also. the sports business is highly lucrative, so they must get a fair share of their contribution to it. Thirdly, their active life as top athletes is short in duration, so the nature of their work (along with fashion models) requires them to be paid more incomes in the present.

    But what about the market return you earn as a hard-working and successful CEO? The market rate is determined by not some “natural” forces, but by the institutional arrangements we permit and encourage. Surely today’s CEOs don’t contribute so much larger values than those in the past? That’s where the copensation committees play a crucial role in raising the level as they see fit. To quote from Huff Post:

    “CEO pay spiked 725 percent between 1978 and 2011, while worker pay rose just 5.7 percent, according to a study by the Economic Policy Institute released on Wednesday. That means CEO pay grew 127 times faster than worker pay.” By the way, this is also the period when worker productivity grew.

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