It’s Pretty Unlikely That American Companies Pay Their CEOs on Expected Performance

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


Matt Yglesias thinks it’s hopeless to argue about whether American CEOs are overpaid:

Take CBS, which I write about in the column. They had almost $15 billion in revenue in 2011. So the value to the company of a CEO who can boost revenue 1 percent higher than a replacement-level CEO would to the company is about $150 million. So if you have a 50 percent confidence level that CEO Leslie Moonves is 1 percent better for the company than a replacement-level CEO, then you’d be justified in paying him as much as $75 million a year—making him “underpaid” with 2012 compensation of around $60 million.

As a practical matter, I agree. There are certain metrics that suggest CEOs are overpaid, and there are others that suggest they’re just earning fair market value. We liberals can point to gigantic yachts and gold-plated toilet seats as ways of swaying public opinion on this subject, but we’ll never win on empirical grounds.

Still, I want to use this as an opportunity bring up one of my longtime hobbyhorses. Ask yourself: What would we see if American companies were really paying their CEOs gigantic salaries based on a belief that a great CEO has a huge impact on earnings1 compared to the 2nd best CEO? Answer: we’d see genuine pay-for-performance packages. That is, Les Moonves’s compensation would be set at a fairly modest level unless CBS performed objectively better than its peers, at which point his compensation would go up quickly.

Now ask yourself another question: how many Fortune 5000 CEOs are actually paid this way? Answer: not many. This suggests pretty strongly that neither companies nor CEOs are truly confident in their ability to do better than the 2nd best guy out there. And that in turn suggests that fat CEO pay packages are based on something else entirely.

1This is usually the metric companies actually care about. Or maybe stock price, or return on invested capital, or something like that. But probably not revenue.

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with The Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with The Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate