Monday, September 28, 2009

Arbitrary Ranking of the Day...

...because who likes those wily CEOs and all that money they make? Here's a listing of the 5 most overpaid, which, as best as I can tell, is determined by some arbitrary metric of salary and bonuses in light of stock performance.

The irony being, of course, that CEOs are generally compensated with stock options, meaning these folks got paid less due to the performance of their respective corporations. Maybe it's an argument for a higher variance pay structure-- less when companies perform poorer, more when companies do better. Something tells me that's probably not the case.


Matt E. Ryan said...

Here's a related story from the NYT on executive compensation and its role in the downturn:

Will Luther said...

Of course, all metrics are arbitrary to some degree for the simple fact that the scientist must decide what to include and what to exclude. However, I am assuming you are trying to say something more in your use of the word "arbitrary."

I am not sure what you actually mean by the word, but my interpretation is "lack of atheoretical foundation." If this is the case, I disagree.

If we assume individuals in equilibrium get paid according to their marginal labor product, it might be reasonable to estimate the trend line and see who is above and who is below (yes, this also implies some CEOs are underpaid, which these articles don't usually mention). I am not arguing that it is a perfect metric. But show me a metric that is perfect and I'll show you a naive scientist. ;)

The biggest flaw, IMHO, is that the performance variable is rather shortsighted whereas those setting the pay level are more forward looking. It seems much more reasonable to look at a batch of retired CEOs and estimate the historical trend line then to assume that the CEO will not make up for this year's poor performance in subsequent years.

Imagine if we did a similar study for college football coaches. Rich Rodriguez would be deemed "overpaid" if we looked exclusively at his first year at Michigan when he went 3-9 (or his first year at WVU, 3-8). Of course, he would probably be considered "underpaid" in the 2005 and 2006 seasons at WVU where he led the school to its first ever consecutive 10 win seasons. I say wait until he retires and then run the stats.

Matt E. Ryan said...

I think you considered the use of the word more than I! But if I were to attach a more accurate definition to it, I'd say "arbitrary" tried to capture that salary vs. stock performance was somehow inherently superior to any other method. I agree with you-- all methods will have some decisions made on the Webster's definition of "arbitrary"-- but this ranking, to me, seemed to ooze a bit more confidence and "it needs to be looked at in this manner."