A Distorted View of CEO Pay

By Kevin D. Williamson

Friday, May 24, 2019

Peter Eavis has written a very odd column for the New York Times.

It begins: “This is not a difficult time to be a chief executive,” and it takes as its centerpiece Tesla CEO Elon Musk and his compensation package, which is worth — notionally — about $2.3 billion.

I am not sure that this is an easy time to be the CEO of Tesla. I doubt that there’s ever a particularly easy time to start an automobile company from scratch. Musk seems to be having a hard time of it just now.

Eavis himself notes that it is highly unlikely that Musk will meet the business goals that trigger that $2.3 billion payday. To do so, Musk would have to make the shareholders of Tesla about $615 billion, raising the market value of the company from $35 billion to $650 billion. Here is a question that I am sure is not on any final exam at the Harvard Business School: How many times would you trade $2.3 billion for $615 billion? I’d take that trade eight days a week.

Musk’s theoretical bonus for hitting that goal would be less than 1 percent of the increase in shareholder value that had been realized under his leadership. That does not seem to me excessive. Commissioned salesmen routinely make substantially bigger commissions than that as a percentage.

If Eavis really thinks that it is easy to add to the profitability of a large and complex enterprise, he might consider visiting a few of the executives of the New York Times Company and see what they think. I will bet they tell a different story. The Times is doing pretty well of late, but getting there surely has not been easy.

The study he cites calculating the median pay increase for the 200 highest-paid CEOs is defective as well. It lists Musk’s change in pay at 4,575,310 percent and his total compensation at $2,284,044,884 — the figure that Eavis himself acknowledges that Musk is unlikely to actually realize. By far the most common entry on the study’s change-in-compensation metric is . . . “N/A.” That is because the compensation of lists such as this change from year to year, because this year’s highest-paid executives will not be the same as next year’s; in fact, more than a quarter (51 out of 200) of the CEOs listed in the study had “N/A” for their change-in-compensation figure.

This reminds me a little bit of the headlines you see every few months claiming that the income of the households in the top 1 percent has grown by x percent — without accounting for the fact that the compensation of the top 1 percent changes from year to year. The top 1 percent households in 2018 were not the same as they were in 2017 or 2008. If you track the actual incomes of households that are in the top 1 percent in any given year, you get a different story — over time, a considerable share of them fall out of the top 1 percent. (Many households end up in the top 1 percent because of a one-time payday, as when an entrepreneur sells a business or an executive cashes out options before retirement.) What the data those headlines are misrepresenting actually tell us about his how much income it takes to be in the top 1 percent, not the change in income of the households that were in the top 1 percent in in any given year and those households’ incomes in later years.

Musk is an interesting character with some obvious shortcomings. But he didn’t take Tesla from being a $200 billion company to being a $235 billion company — he took it from zero to $35 billion, going from whimsical notion to putting hundreds of thousands of cars on the road and capturing a big piece of the electric-car market in a remarkably short period of time. And even that may prove to be insufficient to ensure the firm’s success.

Not difficult? Try it.