Friday, March 19, 2004

Michael Eisner, part 2

Title: Why pay millions for corporate moochers?
Source: NYT
Date: March 9, 2004

From the article:
    The business world finally cracked down last week on one of the world's biggest welfare moochers, dragging Michael Eisner out of the chairman's seat at the Walt Disney Co.... The larger question is not why the Disney board allowed Eisner to run the company nearly into the ground. Rather, it is why it has paid him $285 million since 1996 to do that.... You'd think that the board could have found a chairman to mismanage Disney for only, say, $2 million a year. But corporate boards routinely overpay for mediocrity. Indeed, while corporate America ruthlessly applies capitalism to shave costs in acquiring paper clips or secretaries, the top executive suites tend to be, along with North Korea, the world's last enclaves of socialism.
    The problem with "the great CEO pay heist," as Fortune magazine once called it, is that the free market is not at work here. The average chief executive of a major corporation now gets $10.8 million a year, almost 20 times as much as in 1981, as the result of a classic market failure.

    "The salary of the chief executive of the large corporation is not a market award for achievement," John Kenneth Galbraith noted back in 1980. "It is frequently in the nature of a warm personal gesture by the individual to himself."
    Pay is decided by a few board members, often the chief executive's friends, who are perhaps themselves chief executives sympathetic to the argument that $200 million is about right for such hard work. Compensation experts are hired for advice, but they know that the way to drum up business is not to save shareholders money.


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