Thursday, April 23, 2020
A recent article in The Guardian caught my eye because I am in the midst of revising and updating the part of Chapter 7 in the Anti-Textbook that deals with CEO pay and whether that can be explained by the conventional supply and demand story. It describes the sharply critical views of Abigail Disney (pictured here) who is unimpressed by Disney employees facing mass layoffs while the company shovels $1.5 billion to senior executives and stockholders. (A web search will uncover many more articles about her critique of the "insane" pay given to the current chief executive.)
The article details some of the payments to senior executives. The outgoing CEO was paid 900 times the amount paid to an average Disney employee. The new CEO, according to the report, could receive a bonus of "not less than 300 percent of salary" and a long-term incentive payment of "not less than $15 million". A nice floor to have put under one's earnings no matter how the company performs.
As part of my background work for the book, I have surveyed 10 representative North American introductory microeconomics textbooks on many topics. On this particular topic, eight of the 10 books mentioned the issue of CEO/senior management "compensation". Remarkably, not a single one directly connects issues of corporate governance with CEO pay, despite the prominence of this theme in the academic literature. Not a single one describes how CEO pay is actually determined.
In public corporations, it is typically the job of a compensation committee of the Board of Directors to determine this. As you know, Boards of Directors are there to look out for shareholders interests, at least on paper. For fun, I am going to quote Warren Buffett's views on compensation committees:
"The typical large company has a compensation committee," said Buffett. They don't look for Dobermans on that committee, they look for Chihuahuas." He paused, amid laughter, then added: "Chihuahuas that have been sedated."
I decided that space limitations prevented me from extending the quote further, but the report from Money magazine continued, quoting Buffett's business partner Charlie Munger who added: "I'd rather throw of viper down my shirt front than hire a compensation consultant." (Compensation consultants or people who make their living advising compensation committees about how much the CEO is worth.)
Obviously Buffett and Munger have not read the introductory textbooks that could explain to them the error of their ways.
Or perhaps they have read the nonmainstream introductory textbooks, every one of which discusses the actual issue. I will be quoting from Understanding Capitalism by Samuel Bowles and his co-authors who explain quite clearly the influence that the CEO has over the whole process. (If you are interested in the details, you can still do no better than the 2006 book Pay Without Performance by Lucian Bebchuk and Jesse Fried. Despite some tinkering with the regulations and attempts to improve shareholder say over senior executive pay, the book remains sadly relevant.