Why CEO's make so much money part 3

In the previous two posts I discussed how a man or woman could be worth millions of dollars if they make the company more than that company pays them. In addition, opportunity costs are very high as a CEO and that must be compensated.

Incentives are another reason for a CEO being paid such "obscene" amounts of money. Instead of using economic jargon or a hypothetical let me explain this to you from a real life scenario that has taken place. My brother Archie worked for Sears as I did for a few years. He was the Lead of Package Pickup. This job was tough and payed very little. My brother stuck with the job because he planned on becoming a salary manager when a position opened. Sears payed those people nearly twice as much a year to start off. After becoming a department manager, the successful ones are given the opportunity of becoming an operations manager which is second in command of the store. From there you can get promoted to Store manager and of course your first store manager position is at a small store and if successful then you can get moved to a larger store for much higher pay. From here you can imagine the levels that you go through before becoming a National level employee such as CEO. Each of these positions would not be filled with quality people unless each level is paid adequately to take the position. If Sears wants to have good district, region, and then National management (IE: CEO) then they have to pay that person not just enough money to take that position but enough to spend decades coming up in the ranks doing jobs that are not nearly as attractive and do not pay a lot. How important are these high pay incentives? My brother quit and got another job because Sears began hiring managers throughout the store from other retail chains. My brother was passed over and not given adequate raises for his work and thus lost interest in the company and now works for Comcast. Sears was very upset that he quit but they only have themselves to blame. They lost one of their best employees due to a loss of incentives.

If CEO's are not paid extremely high profits for a short career, to cover opportunity costs, to incentivize other managers to work hard in order to rise up in the company then the company will fall apart at all levels. Low scale management or "leads" work hard to rise up. If managers are not paid high amounts then low scale workers will too lose interest in doing a good job for the company because they will have no incentive to be successful hoping to eventually rise to that position.

One more point. Some complain that CEO's are paid too much money when they do a poor job. Why would a company pay a CEO whom they just fired such an "obscene" payout to leave when he has lost the company millions of dollars or even more. This is simple. If that CEO is losing the company $100 million a year and is being paid $60 million a year as well then his cost to the company is $160 million a year. If he or she has three years left on a contract and the company wants to end that contract then it is more profitable and efficient to pay off the manager an amount that is less than what he would cost you in losses over the next three years of that contract plus the money in profits that is possible with a new CEO. This means even a $479 millions dollar payout is profitable to the company. This might be hard to swallow but it might be worth paying that CEO tens of millions to get rid of him or her now and not worry about a big drawn out court case that is expensive, you might lose, and doing so while your company is still losing money each year in profits.

I hope these last three blogs have been informative to you. If you learn just one thing from these blogs please let it be this; There is no way that YOU or the GOVERNMENT or any group of people can possess the knowledge and information to compute the correct salaries paid to CEO's, the price of a good or any other costs for that matter. That is why we have allowed the free market to make these decisions. The people with the most knowledge are the consumers paying the prices, and the stockholders on the board that has all the resources available to make the correct decision. How stupid can we be to think that Barack Obama or John McCain can honestly know what is best?