Friday, December 03, 2010

Jeter's $45MM Seems Fair

Derek Jeter has had a great career, but last year he hit .270 (mediocre)). Nonetheless, he's fielding offers like $45MM for 3 years. Yet, no one seems very angry about exhorbitant pay in athletics, as compared to CEOs. Here's Holman Jenkins over at the WSJ:

Said one fan on a New York paper's website: "As far as the money is concerned, I really don't care what they pay him. It's not my money." If it were catching, this healthy-minded attitude toward the paychecks of our fellow man would make the world a better, happier place.

Jeter clearly has alpha in a narrowly defined sphere that most of us recognize. We can see he is good at what he does--much better than us or anyone we know personally--and thus earns his pay. In contrast, the suspicion is that CEOs are merely involved in a massive crony-capitalism game that discriminates against those who don't have the right family and friends. That strikes many as unfair.

Former Clinton Attorney General Jamie Gorelick made $40MM while running Fannie Mae and the mortgage market into the ground. Rahm Emmanuel made made $16.2 million in his two-and-a-half-years as an investment banker. Bob Rubin pocketed $150MM while working for Citigroup. The list goes on and on (recent OMB director Peter Orzag was just hired as an investment banker by Citibank). These are problematic because we know they are getting paid merely for access--Rubin claims he was totally unaware Citi had $54B in mortgages on their balance sheet, which was probably true--for getting the right person to answer a phone, or bury some exception in the latest 2000-page bill or trade agreement. That's a game not available to most of us.

But then there are (relatively) unconnected CEOs who merely make too much. Merrill Lynch CEO Stanley O'Neal made $46MM and $48MM in 2006 and 2007 respectively, then got a $161MM severance package after Merrill was sold for a song to Bank America. As noted in 'The Devils are All Here', he golfed every day, and basically had no idea what was going on related to mortgage exposure that would destroy his firm. Managers of large firms are rarely the brightest and best (exceptions usually being founders), but rather someone of steady temperament.

The CEO is often a compromise between conflicting groups. He must be blithely ignorant about the inconsistent objectives articulated to the team, such as trying to simultaneously prioritize innovation and tradition, a meritocracy that aggressively promotes racial bean-counting, or a strong sexual harassment policy and a really fun Christmas party. People who are really good at logical puzzles, who excel at something, are often not very good at managing people because they can not, or will not, suffer fools well. Thus, in spite of conspicuous examples where the highest IQ person is both an idea generator and the boss such as Larry Ellison or Bill Gates, in general the functions involve different skill sets. The result is a leader in a modern reverse dominance hierarchy who is paid to keep the peace and make people feel good, as opposed to make really important strategic and tactical decisions. It's a skill, but not one worth tens, let alone hundreds, of millions of dollars.

We don't mind inequality when we know it is for true alpha. What bothers people, and I think rightly, is when people are getting paid when they really do not have alpha, in that their ability to chair meetings, spout cliches at group functions, or golf leisurely, is something anyone could do. In contrast, if we played shortstop for the Yankees we know the team would suffer. It's a problem I don't have any solution for.


Todd said...

How would this dynamic fair if limited liability were eliminated and CEO's were personally on the hook for their entire fortune?

Anonymous #5 said...

But then there are unconnected CEOs who merely make too much.

What makes you describe O'Neal as "unconnected"? Did he win some lottery to come off the street to become CEO?

Eric Falkenstein said...

you're right, clearly he's connected...just not a blatant access point like Emanuel or Rubin.

Patrick R. Sullivan said...

Todd, if limited liability were eliminated the modern world would cease to exist. Who would invest then?

Eric, I think you're wrong that 'anyone' can chair a meeting, tell the right anecdote, slap the right back.... I remember the Jerry Lewis character (i.e. Johnny Carson) in The King of Comedy telling the Robert DeNiro character how difficult it was to make it as a comedian; 'I know this looks easy, but it takes years to develop the timing....'

Eric Falkenstein said...

Patrick: I agree for the most part...I just think that this skill is probably worth a mere million, because it is not like Jeter or Stevie Cohen's alpha. Stanley O'Neal's ability to chair a meeting might have been good, but I know a lot of guys who can do that--not everyone, but a lot.

Salem said...

Of course, Jeter is not fielding offers like 3/45. He's got one team, and one team only, that is prepared to pay him anything like that, which is why his contract negotiations are an advanced form of "chicken."

And it's the same with the CEOs. I don't think anyone would seriously claim that Stanley O'Neal's pay was $46m because someone else offered him $40m. CEO salaries are simply the principal-agent problem at work.

Anonymous said...

I guess you implied alpha combined with demand, otherwise everyone in the Guinness Book of World Records would be making lots of money.
And I'm not being flippant. Consider what they're doing - they're the best at doing things with balls (hitting, catching, throwing, kicking, etc etc) or something like that. The Guinness records folks are the best at what they do too.

I would lump in pro athletes with overpaid CEO's.
I think their pay is atrocious. From the perspective of contribution to society, compare athletes to what a good set of parents contribute. But I guess that's not the way things are valued, and my opinion is the minority.

David Kane said...


I would be curious about your thoughts on my idea for giving public company shareholder's an up/down vote on CEO salaries. Details:

Anonymous said...

My favorite example of the insanity of CEO pay is how the pay of oil company executives is linked to the price of oil, which they have no control over (we hope).

Rajat said...

But the point remains that, like the fan on the website said, "it's not my money".

J said...

Keeping the peace and make people feel good is the most important function in a workplace. In every office and bureaucracy, factions develope and intrigue against each other, making life miserable for everyone and reducing productivity. Zen teaches that a leader does nothing, yet everything happens as it should. He establishes harmony between earth and heaven, so to say. Running any large organization is a rare skill and the market pays exactly what is worth.

Anonymous said...

If you calculate the actual number of days/hours a baseball player actually plays,....

Ritholtz said...

Roger Lowenstein's Origins of the Crash looked at the problems of crony boards and overpaid CEOs contributing to the 2000 crash.

The mutual funds -- supposedly representing their shareholders/investors are too busy trolling for Pension / 401k money to volte their shares honestly.

The "compensation consultants" are just overpaid whores who provide cover for the CEO's golfing buddies/crony board.

This has gone on for decades.

Dave said...

"Roger Lowenstein's Origins of the Crash looked at the problems of crony boards and overpaid CEOs contributing to the 2000 crash."

Buffett made a similar point in one of his shareholder letters a few years ago.

"The mutual funds -- supposedly representing their shareholders/investors are too busy trolling for Pension / 401k money to volte their shares honestly."

An idea I mentioned in a post on this a while back:

"Since mutual fund managers tend to vote their shares in lockstep with corporate boards, one way to strengthen the voice of retail shareholders might be to require mutual funds to aggregate the votes of their retail shareholders on, say, the funds' top 5 or 10 holdings, and then vote their proxies accordingly."