by the Way . . .

You hear a lot about excessive CEO compensation, mostly from poor people like college professors and journalists. Here our examination of the dictates of nature, history and the scientific basis of compensation theory should set the record straight. You will see that the term “excessive” simply has no relevance.

First, we are talking about the CEOs of major widely held companies. This excludes CEOs that hold a significant percentage of the stock in their company, as that would be like taking a portion of your compensation from your own pocket, which really spoils it. Likewise we exclude companies with just a few shareholders, because there you have to share, i.e. if you take more out of the company, they want more also, which is obviously no good. We confine our discussion to those situations where no stockholder has any say, or really any interest, in the level of your compensation, as it is irrelevant to their decision to hold or sell. If they think your compensation is outsize, it is still basically a “fly in the soup”, i.e., distasteful, but given the size of the pool you don’t eat that much.

The basic rule of nature is that everyone takes all they can get. This applies to all animals, but with most the limit is how much they can eat or how many females they can keep track of. With humans it is different. We are way more advanced than animals and have developed so many ways to consume that we have abolished all natural limits. We can take until something stops us, some outside limit. Now let there be no misunderstanding, the poor people (and that includes the “working poor, basically everyone but CEOs, politicians, and thieves) are taking all they can get, it is just that they can’t get very much. So there is no moral issue here. We are all in the same tote. You doubt it? Let’s do a little thought experiment, like Einstein made so popular. I place two stacks of cash on the table, one of $100,000 and one of $1 million (I have reduced the amounts way down so you can grasp the concept). Given the choice, which one will you take? OK, next issue.

History is replete with examples of taking and limits. The pharos of ancient Egypt may have looked like they had no limits, being gods and all, but there is only so much you can do with golden cats and statutes. They had to turn to pyramids, only to face a new limit, how many stones you could get moved before you died. Try to exceed that, and you end up with someone else in your sarcophagus, or worse, moving in while still under construction. And we should note here that one of those babies, never mind the Great Pyramid, costs a whole lot more in current dollars than the measly 3 or 4 hundred million most CEOs take. Why do you think none of them have pyramids?

Do-gooders (the poor plus the super rich worried about facing the afterlife with no pyramid, yes, you know who you are, Bill) suggest that CEOs and the boards that dish compensation should be limited by embarrassment or public opinion. This not only ignores the basic law of nature, see above, but assumes that somehow the CEO thinks he is taking more than he is entitled to. Au Contraire! The whole take is governed by scientific measurement and the principle of sharing. This is a different kind of sharing than what we discussed about companies with few shareholders. The sharing is with outside compensation consultants and the directors, and while not major, forms the basis of the modern limit.

This is how it works. The consultants determine the range of CEO total compensation for all companies for the previous year. The midpoint of the range is the 50th percentile. The board then rates the CEO. "Average" means he should be at the 50th percentile, "excellent" at 75th and "superior" at 90th to 100th. The scale has lower values, but no board would retain a CEO they think was below average, so these are rarely used. As you would expect, given the excellence of management in the United States, in general the ratings fall in the excellent to superior slots. It is as if there is an “invisible hand” in the till. No board should be embarrassed for giving amounts which have been vetted by one of the very few top consultants (there are very few, as the dullards have been weeded out, a la Darwin). And of course, there should be no poor people on the board. Having never made any real money, they lack the perspective and experience necessary to rate a CEO.

Never forget that the CEO also labors under a heavy obligation to his class. He must take what the scientific studies award. Suppose you read all that poor people carping and decide to commit an unnatural act and only take only $1 million a year. You have just lowered the midpoint of the range. When the boys at the club and your regular foursome find out you might as well take up bowling with the working poor.