Nice job if you can get it!

Based on the Forbes chart reproduced below, one can see that the gravy train of CEO compensation has resumed its unstoppable acceleration.

Assuming the current average CEO pay and an average return of 5%, an investor would need to invest 200 million to achieve this level of income. Since there are no risk-free opportunities paying this type of return one must conclude that investors would be better off by “buying” a risk-free CEO job that pays this level of compensation.


Nevertheless, as shocking as these numbers are, they hide the true scale of the problem by mixing CEOs that are founders or significant investors in their companies (where compensation and dividends may be mingled) with CEOs that are simply managers. In particular, it hides the outrageous pay in the so-called managerial capitalistic sector.

This sector is run by the second type of managers. It includes all companies where control is exercised not by the owners but by incumbent management, and it can be divided in two broad categories – licensed monopolies/regulated firms and companies with a high level capital dispersion preventing individual investors from exercising control (typically companies with a float in excess of 95%).

The absurdity of such pay packages can be illustrated with reference to the greediest and the worst performing CEO, based on the Forbes list and SADIF Analytics rankings respectively. The first is John H Hammergren the CEO of McKesson´s, a drugs & biotechnology company, who earned a 6-year average compensation of $50.79 million. The second is Daniel R Hesse the CEO of Sprint Nextel, the telecommunications operator, who earned a handsome $.6.6 million last year. Their basic cash compensation and respective company´s stock price performance are depicted in the two charts below.

And, what have they achieved during their recent tenure? McKesson´s investors had a 6-year annual total return of 9% (a paltry 2% above the industry ETF), while Sprint´s investors total return was a huge loss of 31%. Another way to see what is at stake is to take the case of a large shareholder in McKesson´s, for instance the 8th largest (Glenview Capital Management, with a stake worth about $414.1 millions). They would need to have invested almost $250 million to earn an amount equivalent to just half of what the CEO made. That is, they would be better off by trying to “buy” the job for themselves.

Large organizations are bureaucracies whose short term performance is to a large extent independent of their leaders. Indeed, like governments, most would not notice if the CEO/President had taken a long leave of been replaced by a dummy. And, likewise those leaders who really shape their future would perform as well whether they earned 800k or 1600k.

So the sky-rocketing of management pay sparked by the rise of managerial capitalism in the 1980s is not a matter of performance reward but truly a case of CEO-Kleptocracy.

Sharing the gains of research: public costs vs. private profits

The rewards from research are basically unpredictable. A researcher may spend his entire life tackling a problem without finding a solution or he may find a solution in a matter of minutes. Equally, society may value instantly a discovery or it may take centuries before finding a profitable use for such discovery. This raises some fundamental questions on how to ensure a fair sharing of the rewards of scientific endeavors.

Let us use the tale of four friends who began their research careers at the same time and retired on the same day. Researcher A, B, and C worked in a public sector University while researcher D worked in a private sector company. By sheer chance, on the first week after retirement, researchers A and D came up with a discovery they had pursued their entire life and that can be immediately sold for 100 million each. Researchers B and C did not make any money-making discoveries but had significantly different careers. Researcher B was a hard working researcher like researcher A, while researcher C enjoyed an easy life and devoted himself to academic politics that frequently were hostile and obstructive in relation to the work of researchers A and B.

The first question to reflect is on whether researchers A and D should keep the 200 million or should payback some of the money to their former employers. Since their employers financed the freedom they enjoyed to conduct research during their entire career, it seems fair that they should share the gain with their former employers. Note that this applies regardless of how much their employers spent on their research projects. Indeed, researcher D is most likely to have some claw back clause in his contract with his former private sector employer that will force him to return 70% or more of his gain to his former company. However, in many government institutions researcher A would get away with keeping his full gain. This would be a typical case of socializing the costs and privatizing the gains from research and most of us would consider it as an unfair greedy behavior.

But let us judge the fairness of the situation from the point of view of the researchers. Research is a rather individual process, and therefore its results are largely perceived as an individual achievement. Moreover, in some fields, like literature, employers do not support any costs beyond the researchers’ salaries. While other institutions make the life of their researchers a hell. So from the individual researchers’ point of view it seems extremely unfair that those who contributed nothing to their money jackpot now want to keep a large share of the gain. For instance, researcher A would not mind sharing the money with his university provided that it would be used to finance the careers of future researchers like his colleague B, but he will feel defrauded if the money is to be used to pay for the University’s bureaucracy and to finance researchers like his colleague C.

So we may conclude that there is no single standard to judge the fairness of the distribution of the gains from research. Only a balanced view of the interests of the researchers and their institutions will be conducive to a solution that can be judged fair on unequivocal moral grounds.