Pay for Performance

According to The Nation:

According to the Institute for Policy Studies and financial reporter Michael Brush, CEOs at top defense contractors have seen annual pay raises of 200 to 688 percent since 9/11. The average annual salary for a CEO at a top defense contracting firm is now more than $12 million.

On one level, this is easy to understand. Defense contractors must have made a ton of money since 9/11 thanks to the massive hikes in defense spending. On another level, though, it's baffling. Defense contractors are making more money because of the war in Iraq and the "war on terror" not because they have super-smart CEOs. Why does their pay need to be tripled or more? Meanwhile, if the political situation ever changes and military spending goes down, lots of workers in defense-related industries will get laid off, but the executives will doubtless evade the sting of the downside even as the cleaned up during the fat years.

Comments

Ummm, according to Naomi Klein this is exactly the reason we went to war with Iraq.

Posted by AZrider | October 10, 2007 12:37 PM

"On another level, though, it's baffling. Defense contractors are making more money because of the war in Iraq and the "war on terror" not because they have super-smart CEOs"

Ah, unless those super-smart CEOs helped bring about the Iraq war....

Posted by The Navigator | October 10, 2007 12:39 PM

IANAS (that "S" is for "Statistician), but how do pay increases for defense-industry CEOs correlate with pay increases for non-defense CEOs? I believe that salaries for top management in all areas have skyrocketed in the last few years.

Posted by James Gary | October 10, 2007 12:47 PM

"Why does their pay need to be tripled or more?"

The increase was probably written into their contract based on stock or company performance. which, of course, gives them enormous incentive to get their buddies in the DOD and WH to start a war. Where's Eisenhower when you need him?

Posted by Rihilism | October 10, 2007 12:48 PM

"why does their pay need" The phrasing reveals a real obtuseness. The world does not operate by some invisible hand doling out roughly fair or logical results. Why are they paid that much? Because their friends on the board voted it for them, because they are awash in extra cash and there is no one to stop them.

Posted by Doug | October 10, 2007 12:56 PM

"annual pay raises of 200 to 688 percent since 9/11"

Let's see here. Let's take the bottom of that range. 200% annual raises since 9/11, say 5 years, let's see, now that means what, hmmm, oh, yeh, they've tripled every year for 5 years, so, hmmm, that's 3^5 = 729. Gosh this math is hard. Hmmmm, $12 million divided by 729 is, hmmm, let's see -- hey! they sure didn't make much money pre-9/11!

Posted by ostap | October 10, 2007 12:58 PM

uh, Rihilism, I don't think Eisenhower's track record of ignoring corporate interests is in line with his speech on the 'military-industrial complex'. Eisenhower's Middle East policy was almost entirely dictated by US oil interests. I don't have enough time/energy to go into it, but the argument is pretty clearly articulated in "Notes from the Minefield: United States Intervention in Lebanon, 1945-1958" by Irene Grendzier.

Posted by rickm | October 10, 2007 1:00 PM

One could argue that one of the incentives of taking on a job as CEO of a defense contract firm is that there is the possibility, during your tenure, of a war breaking out, providing you with big bonuses.

It's like saying that a job offer comes with a base salary, performance incentives, and a lottery ticket.

Posted by Tyro | October 10, 2007 1:07 PM

Why does their pay need to be tripled or more?

On a related note, why does a dog lick his balls?

Posted by Samuel Glover | October 10, 2007 1:16 PM

Assuming this is true - and I wouldn't trust the the Institute for Policy Studies (an "Institute for the Rest of Us"??? Do they celebrate Festivus there?) - I would think that the increases were likely the result of an increase in the value of restricted stock or options previously granted to the executives. Their value would automatically increase with the stock price of the company, regardless of whether the rise in stock price is industry wide. And, of course, these types of compensation could have been granted before 9/11, so the increase in compensation would be automatic and independent of the Boards of the companies making any decision to grant such an increase in compensation.

Posted by Al | October 10, 2007 1:27 PM

Economics tells us that the war breaking out and defense contractors becoming more profitable has probably encouraged entry into the industry and increased competition. It's not that CEOs are responsible for past performance -- it could be that defense contractors are now competing for top management talent to remain profitable in the face of new competition. Furthermore, the rampant corruption and cronyism in Republican-run Washington might make well-connected CEOs even more valuable in defense contracting than in other industries. Just a thought.

Posted by Hat | October 10, 2007 1:27 PM

I agree with Hat. For defense contractors, connections are essential to bringing in the cash. Connections are probably even more important to the Bush administration than previous administrations; hence, CEOs have become more valuable.

Posted by Mr. Noah | October 10, 2007 1:36 PM

"Why does their pay need to be tripled or more?"

Because you loot the coffers when they are full of gold, not when they are empty.

Posted by josephdietrich | October 10, 2007 1:53 PM

This is such a half-assed country compared to World War II. The Twin Towers have been a big hole in the ground for six years. Meanwhile, Leslie Groves designed and built the Pentagon and then invented, fabricated and deployed the atomic bomb in less than five years total.

More to the point, Roosevelt knew that war was good for business (the GDP doubled in the course of the war). FDR imposed wage and price controls, excess profits tax, increased the top income rate tax to over 90% and declared "I don't want to see a single war millionaire created in the United States as a result of this world disaster".

Posted by beowulf | October 10, 2007 2:02 PM

ostap-

Clearly, it means "a raise in annual pay" - that is, their salaries have increased over the last six years by 200-688 percent. The were making in the $1-5M range before.

Also, Matthew's obtuseness is surely a deliberate rhetorical strategy. Obviously the Market is not dictating these prices - the Market being a chimerical construct of rightish economists - rather, it's existing structures of power that reward those in power.

Posted by DivGuy | October 10, 2007 2:04 PM

My understanding is that CEO salaries, on average, tend to be roughly proportional to the size of the company. So I'd guess this is probably just an example of that effect (defense companies have been expanding so CEO salaries are going up).

Why should it work that way? Well, consider this: suppose a hypothetical "super-smart" CEO could do something like increase the profitability of your company by X% as compared to a "not-so-smart" CEO. During negotiations over salary, how much should you be willing to pay such a CEO? Obviously, that is a function of the size of your company, because the basic goal will be to work out a fair split of that X% profit premium, which itself is a function of the size of the company.

To think of the same point another way, imagine two companies in the same industry competing for the services of a particular person as their CEO. What salary figure will the winning company have to offer? Pretty obviously, that will be a function in part of the size of the companies in question. So if companies in the defense industry are growing, one should expect CEO salaries to grow in a similar fashion.

Posted by DTM | October 10, 2007 2:09 PM

Although, am I the only one who assumed that CEOs at top defense firms were already doing closer to $100M than $12M? Compared to many, $12M sounds downright paltry.

Now if you'll excuse me, I've got to check under the furniture for a few more quarters so I can get a sandwich.

Posted by Imaginary | October 10, 2007 2:33 PM

Why should it work that way? Well, consider this: suppose a hypothetical "super-smart" CEO could do something like increase the profitability of your company by X% as compared to a "not-so-smart" CEO. During negotiations over salary, how much should you be willing to pay such a CEO? Obviously, that is a function of the size of your company, because the basic goal will be to work out a fair split of that X% profit premium, which itself is a function of the size of the company.

But that's really obviously stupid, isn't it?

1) No one else's salary increases in direct proportion to the size of the company.
2) Companies that lose market share keep paying their CEOs - by your logic, the CEO should lose money if the company struggles.

Posted by DivGuy | October 10, 2007 2:36 PM

"uh, Rihilism, I don't think Eisenhower's track record of ignoring corporate interests is in line with his speech on the 'military-industrial complex'."

My apologies, I was trying to be facetious, which is hard to do without the changes in vocal tonal qualities associated with being sarcastic...

Posted by Rihilism | October 10, 2007 2:47 PM

"On another level, though, it's baffling. Defense contractors are making more money because of the war in Iraq and the "war on terror" not because they have super-smart CEOs. Why does their pay need to be tripled or more?"

What part of "alpha male" don't you understand, Matt?

Or were you being facetious?

Do you really think CEOs are actually paid according to their abilities in many, if not most, industries?

DivGuy and Joseph Dietrich have it right. It's called "looting" in most circles.

Posted by Richard Steven Hack | October 10, 2007 6:28 PM

DivGuy,

If you think about it, there are usually some obvious reasons why some salaries scale up with the size of the enterprise, and some don't. Consider that for many positions, the number of people sharing that position will also scale up with the size of the enterprise. So, for example, as a business grows the salaries of the administrative assistants won't necessarily scale up proportionately, because the growing business will be adding proportionately more AAs.

What is somewhat unusual about the CEO (and a few other top executives, whose salaries also tend to scale up like this) is that no matter how big the company, the number of CEOs usually stays the same (namely one). Hence the scaling effect.

This is not the only sort of position that experiences such an effect, however. Consider, for example, professional sports teams. As the revenues for professional sports teams increase, the salaries of the team players tend to scale up proportionately. Why? Because the number of players per team is fixed, as with the CEO, and unlike with the AAs.

Finally, a company which got smaller probably would end up paying its CEO less, at least eventually. Of course, the mechanism would likely be firing the old CEO and hiring a new one at a lower salary.

Posted by DTM | October 10, 2007 7:23 PM

A simpler explanation for why the CEO's pay rises so fast when revenues rise is that, since they have the power to take the extra money, they do.

Posted by brooksfoe | October 11, 2007 4:30 AM

While some of it is performance pay I think CEOs, like most high paying jobs (top lawyers, investment bankers, traders) are basically paid in equity of the company because it's the most efficient way to compensate extremely productive workers. It makes labor costs counter cyclical, has an incentive effect, and the potential for huge payouts seems to be attractive to money grubbing workaholics (relative to steady above average pay).

Posted by Kyle | October 12, 2007 8:40 PM