Monday, January 5, 2009

Outrageous CEO compensation is a serious problem. Many CEOs manage to create incentive structures for themselves that make them rich even while investors lose money. I’m usually happy to see media reports that shine the light on this issue, but a recent article is so silly that it distracts from the real issue.

On the weekend, I read the following headline: CEOs beat employee's annual wage in 4 minutes, study shows by Eric Beauchesne (the web page with this article has disappeared since the time of writing). This sounds fishy. Only 4 minutes? I know these CEOs make a lot of money, but this is crazy.

Before reading the article, I did some simple mental calculations. Let’s say the employee makes \$40k/year. If the CEO makes this much in 4 minutes, that’s \$10k/minute, or \$600k/hour. Based on a 40-hour week, that’s \$24M/week, or about \$1.25 billion per year! I doubt that very many CEOs are paid his much.

Beauchesne’s article contained enough statistics that I was able to figure out that the average of the 100 highest paid CEOs in Canada make \$40,237 (the average worker’s yearly pay) in a day plus 4 minutes and not in just 4 minutes. This is based on average CEO pay of \$10,408,054 per year.

In fairness to Beauchesne, he probably didn’t write the silly headline, and he did quote the report from the Canadian Centre for Policy Alternatives accurately. It turns out that the report itself was misleading. A casual reader of the report would definitely be left with the impression that CEOs need only 4 minutes to make the average worker’s yearly pay.

Unfortunately, too many people don’t understand the differences among millions, billions, and trillions. Once the numbers get this big, they start to sound the same to the mathematically-challenged. It should have taken only a minute with a calculator to confirm that the newspaper headline was silly, but nobody managed to catch this. Lost in this farce is the need to properly align the interests of CEOs and shareholders.

1. Hmmm.. about \$40,000 per day? Those guys must own a lot of Ford Focuses!

Time for a corporate salary cap.

2. Me again.

That IS a silly headline, and like you say, the study's presenter was equally to blame. Sure, if we allow that the CEO starts getting paid on January 1st, a holiday, by the start of his first workday, he has made almost \$40,000.

The pertinent part is the one day, not the four minutes! Yeesh.

Good find, and good investigation.

3. Gene: Thanks. A have a fairly strong sense of scale. I was confident that the headline was off by at least an order of magnitude before I really thought about it.

The part that bothers me the most about all this is that this report completely undermines its own credibility with this nonsense. The truth is impressive enough without having to mislead people.