February 3, 2007
The Underpaid CEO
I am all for people making as much as they can in their careers which is why I do not understand the emotional attachment to CEO pay. If those CEOs can make that kind of money, more power to them. It doesn’t bother me that Bob Nardelli made big money at Home Depot – good for him. If I could make that type of money I would.
Now you know where I stand, check out this article from American.com – Why Do We Underpay Our Best CEOs? That’s right – “underpay.” The article is a thorough explanation of the trends occurring in CEO hiring due to the national witch hunt for CEO pay.
In fact, there’s strong evidence that, far from being paid too much, many CEOs are paid too little. Not only do the top managers of multibillion-dollar corporations earn less than basketball players (LeBron James of the Cleveland Cavaliers makes $26 million), they are also outpaced in compensation by financial impresarios at hedge funds, private equity firms, and investment banks. Should we care? Yes. If other positions pay far more, then the best and the brightest minds will be drawn away from running major businesses to pursuits that may not be as socially useful – if not to the basketball court, then to money management.
There is a trend amongst CEO hires that has been afoot for some time.
They start with the observation that big businesses in recent years have been hiring more outsiders – that is, CEOs who don’t work for the company that is bringing them on, or even in the same industry.
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General managerial skills like finance, marketing, and strategy are increasingly more important than firm-specific skills, such as understanding the drug pipeline of a pharmaceutical company or knowing how to negotiate with a steel company’s suppliers, unions, and big customers. In the 1970s, outside hires accounted for 15 percent of all new CEOs; in the 1980s, there was a small increase to 17 percent; and in the 1990s, a larger jump to 27 percent.
Corporations are hiring based on skills and talents of the CEO as opposed to pedigree or experience. This approach is consistent with our hiring process too. Today’s market requires a broad range of abilities as opposed to internal or industry-specific experiences.
As markets grow increasingly globalized and information – thanks to the Internet – becomes more accessible, it’s not hard to see why boards of directors are going outside their companies and industries to find CEOs.
Finally, the one piece of information that has always captured my attention regarding people who are upset over CEO compensation:
An able leader has an enormous impact on the success of a business. Certainly, some excessive corporate pay packages are outrageous, as Bogle and other critics claim. But even more outrageous is a system where Dr. Phil makes more than twice as much as Jeffrey Immelt, CEO of GE, the world’s most valuable company; where Jessica Simpson makes more than the average earned by the CEOs of America’s 500 largest corporations; and where hedge fund managers who make the right bet on the yen-dollar relationship can take home ten times as much as the head of the nation’s largest exporter.
Again, I’m all for Dr. Phil making as much as he can in the marketplace. But where is the outcry over his compensation? Or LeBron James? Some CEO packages are excessive but the market corrects them over time. A strong CEO brings a tremendous return on investment that average investors like myself can be a part of by owning stock in that company. That income possibility, to me, is far more interesting than watching LeBron James make $26 million a year.
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