The Arbitrariness of CEO Pay

The New York Times has a pretty fascinating feature on the highest paid CEOs in America that lets you sort the list in different ways. What’s most striking about it, to me, is that not only are these guys paid a ton, but there’s incredibly variation among them. These, for example, are the chiefs of three different companies with $60 billion in 2008 revenue:

Apparently Jeffrey Rein is 4.7 times the CEO that Steve Ballmer is. And Boeing has a CEO who’s a staggering 10.7 times more effective than the top executive at Microsoft. Considering that Microsoft is a pretty big, rich, and important company it seems fairly shocking that they would allow themselves to get along with such second-rate CEO talent. Meanwhile, Louis Gallois, CEO of Boening’s top competitor EADS (parent of Airbus, among other things), makes just 2.1 million euros. To be sure, that’s more than you get working for bargain-basement companies like Microsoft or Google, but given the genius and rationality of the free market it’s surprising that Airbus’ planes fly at all.

Joking aside, two clear patterns emerge in CEO pay. One is that American executives get paid wildly more than do European executives to run basically comparable firms. Look at executive pay in the supermajor oil firms and it’s clear that nationality rather than business acumen is driving the differentials. The other big issue is that CEOs of newish companies, especially tech companies, tend to have much lower salaries. The issue, presumably, is that these guys are major stockholders in the firm. Steve Balmer is one of the richest men in America notwithstanding his low pay since Microsoft is a successful company. But if he were to pull a John Thain and render his company worthless through business blunders, he’d tumble down the list.

It seems fairly clear that European and Silicon Valley norms are healthier than those prevailing elsewhere in the United States. There’s no sign that major European multinationals are crippled by an inability to attract competent executives — the norms are just different and the European CEOs are happy to work for “mere” millions rather than tens of millions. The Silicon Valley model, meanwhile, does let people become incredibly wealthy. But not through “heads I win, tales you lose” bets were bonuses are handed out regardless of performance or through rigged stock option plays. It seems to me that we could have a much healthier corporate America with more Steve Ballmers and more Louis Galloises and fewer Jeffrey Rein’s.


Meanwhile, a decent society will maintain a hefty tax on very large estates. That way we ensure that the Ballmers of the found are encouraged to leave behind generously financed foundations rather than the next generation of Paris Hiltons.