Are CEOs and Celebrities Worth the Big Bucks?

Jan. 15, 2009— -- For people who have lost much of their savings in the ongoing financial meltdown, the exorbitant salaries of corporate CEOs seem outrageous, especially when some of their companies have performed miserably.

Whatever happened to a salary based on performance? And what about the entertainers who earn astronomical salaries despite launching box-office bombs?

Forbes magazine tracks the salaries of celebrities, athletes, CEOs and other top earners throughout the year. Senior editor Matthew Miller follows the money of entertainers and says that between June 2007 and June 2008, author J.K. Rowling of the Harry Potter series topped the list.

"J.K. Rowling is actually the highest-paid celebrity in the world. She made $300 million," Miller told ABC News. "The last book of the Harry Potter series was a best-seller, so she earned every penny of it."

"After that, Oprah Winfrey. Oprah Winfrey is the highest-paid personality in the world," he said. "Oprah banked $275 million."

Will Smith was the highest-paid actor. Cameron Diaz, the highest paid actress.

For A-list movie actors, the number-crunchers at Forbes use salaries, box-office receipts, DVD sales and film budgets to calculate a star's return on investment, or ROI, to see if he or she is worth the big bucks. Miller said Vince Vaughn has one of the best returns on investment because his salary isn't yet in the stratosphere of stars like Will Smith and Johnny Depp.

"Vince Vaughn and Tobey Maguire have the two highest returns on investment," Miller said. "They bring in about $14 per dollar paid for a movie."

It's Not How You Play the Game

For athletes, Miller said it's not just a matter of how good you are or whether you dominate your game -- it's the sport they play that determines how much athletes will bankroll.

"Take Tiger Woods, for example. Tiger Woods made $115 million between June 2007 and June 2008," Miller said. "More than 75 percent of that income came from endorsements."

"Then take Alex Rodriguez, the highest-paid baseball player in the world. Alex took in $34 million," Miller said. "Most of his money actually came from baseball. There's nothing to endorse really. Baseball players don't sell cleats and bats. But Tiger Woods can sell golf clubs and golf bags and golf balls and golf shirts."

Superstars making lots of money doesn't seem to upset people, but many do seem to get upset by lavishly paid CEOs.

Nell Minow of the Corporate Library tracks executives' salaries and has testified before Congress about the weakening link between CEO pay and performance.

"I think people understand that in a good year, Madonna sells a lot of albums, and she makes money off each one," Minow told ABC. "The problem with the CEOs is, it's unfair because CEOs just keep getting paid no matter how the company does."

Minow places much of the blame on the boards of directors that set the CEOs' salaries.

"CEOs, it's a very cozy negotiation with the directors they pick themselves. And those directors are writing a check on somebody else's bank account," he said. "And so they're very, very, very generous, and sometimes those directors are CEOs themselves, who are interested in paying this CEO a lot of money so they can go back and say, 'Look, this is the new standard.'"

The Ability to be 'Self-Delusional'

Many CEOs probably believe they're worth every dime they're paid, Minow said, because they create value for their companies.

"That's because their boards of directors are yes-men who don't say, "No, actually that's not true, let's look at the paperwork, let's look at and see what the returns are,'" he said. "The ability to be self-delusional, in an environment where you're the boss, is unmatched."

Whether deserved or not, economist Dan Mitchell of the libertarian Cato Institutesaid good and bad CEOs must be paid because contracts are binding.

"A contract is a contract, and one of the differences between a civilized society and a banana republic is that the rule of law is enforced," he said.

"It's only our job to get outraged if we're shareholders," Mitchell said. "And if we don't like the way that General Motors or any other company in the country's being run, buy shares, go to the annual meetings, raise a stink … but do not stick your nose in somebody else's business."

Now that Congress is using taxpayer dollars to bail out failing companies, government bureaucrats -- not corporate boards -- want a say about what a CEO is worth, which troubles Mitchell.

"It may very well be that Company A is the most incompetently run company in the world, but I know one group that'll do a worse job," he said. "And that's the 435 members of the U.S. House of Representatives and the 100 members of the U.S. Senate."