Back in 2003, I asked whether it made sense “to make corporate managers as rich as Rockefellers” (original post). I pointed out that paying a CEO or other top executive enough to own multiple houses or become a philanthropist was probably counterproductive for the shareholders. A rich person tends to be busy with his or her possessions and distracted from work.
Just this week I noticed a 2007 study by Liu and Yermack, a couple of business school professors. They figured out where nearly all of the CEOs of the S&P 500 lived, when those houses were purchased, how much they cost, and whether the CEO sold stock to help pay for the house. The paper is detailed but the conclusion is that the guys who bought fancy houses presided over companies whose stock significantly underperformed the S&P 500 index.
More: download the paper free from this site.
[Quaint reminder: in the 2003 posting, I referred to the U.S. economy as “moribund”. Little did I know!]
Is the biggest problem with making corporate managers as rich as Rockefellers that they get distracted by the new toys they can buy?
Given what we’ve seen unfold on Wall St, it seems to me that the problem with paying someone $10million+ / year is that very quickly they’re in a position where they know they will never have to work again for a day in their life and still be able to live in extreme luxury. This encourages them to take much bigger risks with their shareholders’ capital. Their upside is massive and their downside is essentially zero.
You need wealth inequality to drive innovation, but these days most of the executives don’t produce much. They get rich by using the power of the falling dollar & borrowing. It’s not as much the wealth inequality as much as where it’s coming from.
I agree with Alex. There needs to be some sort of downside, even if it’s mostly the lost opportunity to earn a much larger bonus. Perhaps giving CEOs stock options that mature over longer periods of time, would be a useful tool. But these tools already exist, and the root of the problem is a lack of serious corporate governance. The board of the NYSE could have come up with something generous but responsible with Grasso, but they were perfectly happy to be profligate.
CEOS are basically overpaid generally speaking for doing very little anything.
Rather a generalist view, but in relation to what value many bring to a business, it’s a fair point. And rich employees have very little drive!
“You need wealth inequality to drive innovation.” Yes, it’s true, that’s why all third-world nations are bastions of innovation. I mean, Haiti is practically the next silicon valley.