According to Forbes.com the average total remuneration for the American CEO of an S&P 500 company in 2008 was $11 million. That’s over 300 times greater than the median US salary of $35000.
Since the global financial system imploded in 2008, governments and shareholders have had their knives out for CEOs and their exorbitant salaries. Barack Obama was so outraged at corporate bonuses that he appointed a pay czar, Ken Feinberg, to oversee remuneration in corporations that had received government bail-out money. In October Mr Feinberg announced that he would cut salaries by 90% from 2008 levels of 25 top executives from 7 companies that received government bail-out money – companies that included General Motors, Chrysler and AIG.
The data begs the question: Are CEO’s paid too much?
The general perception is that all CEOs are overpaid and underworked but it’s unfair to judge based on absolute numbers. The question should be evaluated in light of two concepts; the CEO’s value to the company and the principle of supply and demand.
Value to the company
Jose Mourinho is the coach of Italian football club, Inter Milan. He earns over $20 million a year, double the average salary of an S&P 500 CEO. Mourinho’s resume is very impressive. In 2003 he won the Portuguese Liga, The Cup of Portugal and the UEFA Cup with Porto. In 2004 he won the Portuguese Liga and the highest honour in European club football, the UEFA Champions League with Porto. In 2005 and 2006 he won the Premier League Title with Chelsea Football Club and in 2008 he moved to Inter Milan, where he won the Supercoppa Italiana and the league title, The Serie A.
There isn’t a public outcry over Mourinho’s salary because he turns average football teams into great teams. Despite the high number, he is worth every cent. The same can be said for a corporate wonder man – Steve Jobs.
Steve Jobs founded Apple Computer in 1976 with his friend Steve Wozniak. In 1985 the board of directors muscled Jobs out of the company. He went on to start another company, NeXT Computer, which was bought out by Apple in the late 1990’s and which brought Jobs back to the company he had started. Apple Inc was an ailing, loss-making company through the mid to late 1990’s and when Jobs returned to Apple, he took over the reigns as acting CEO. The company was coming off a basic loss per share of $6.59 in 1996 and was headed for a loss of $8.29 in 1997. The stock price hovered under $15 per share. Jobs worked relentlessly and cut unnecessary waste at Apple. He streamlined distribution and cut carry costs with better stock management. He combined aesthetics and innovation in developing the iPod, iMac, Mac book, iPhone and iTunes products. In 2009 Apple reported diluted EPS of $6.29 and a share now costs over $200. Steve jobs turned Apple around and for that he deserves his bonuses (In 2001 he received a bonus of $43 million).
But the public isn’t fuming over successful, hard working CEOs like Steve Jobs. It is people like Angelo Mozilo that makes their blood curdle. Angelo Mozilo was the CEO of Countrywide Financial, a subprime mortgage lender. Countrywide was a company that was profitable since its inception in 1969, until they got greedy and began writing risky subprime loans without considering the consequences. In 2007 they ran into liquidity and solvency problems, the share price crashed, credit ratings were downgraded and investors lost millions. The company was taken over by Bank of America in April 2009. For the 5 years leading up to the crash, while the company was silently being rigged for a massive explosion, Angelo Mozilo received average annual compensation of $66 million.
It seems some CEOs are worth their salaries and others are not.
Supply and demand
Executives who have had their salaries cut by 90% are furious and have fought Feinberg ferociously. They argue that they’re professionals who deserve to be well paid. They threaten to leave and they fill boards with the fear that their expertise can’t be replaced. The truth is there are precious few people who can turn around a company like Jobs or can manage a football side like Mourinho. But the perception that there is a shortage of good CEO’s may not be entirely true.
Rakesh Khurana of Harvard Business School explores this concept in his book, ‘Searching for a Corporate Saviour: The Irrational Quest for Charismatic CEOs'.
Khurana argues that many boards appoint charismatic CEOs as corporate saviours. They tend to focus on hiring external ‘superstar’ men who possess a certain style, charisma and charm. They overlook people from within the company that possess a better knowledge of the company and the industry. Shareholders, media and analysts are impressed with these charming attributes and the share prices of these companies do well in the short term. But in the long term the CEO’s abilities, skills and industry knowledge (or lack thereof) are exposed and the company is in a worse position than before. Boards limit their choices of CEO to a small pool of charismatic people and because there are so many companies after the same people, they demand ridiculous salaries. Khurana states the problem is not that good CEOs are in short supply; rather the wrong people are being punted for the job.
It is difficult to believe the chief executives of companies like AIG and Chrysler, who cry that they deserve the money they earn because of supply and demand in the job market. They complain about their salaries being slashed but actually, they’re lucky to still have jobs. After what they allowed to happen to those companies they should’ve been tossed out on the street.
Consider a possible advertisement for the CEO position at a company like General Motors:
Great opportunity with General Motors: General Motors seeks a vibrant charismatic person for its CEO role. Candidate must look good in an Armani suit, must make moving speeches, must be able to charm the press and make small talk with investors. Must be willing to fly in a private jet all over the world and dine in expensive restaurants with other corporate fat cats. Ability to make use of a corporate country club membership is a huge plus. Skills, industry knowledge, decision making and commitment to the company not important and will not help the candidate’s chances in any way. If the company goes belly up and requires a $60 billion government bailout, the CEO will not be held responsible. Apply now!
I cannot think of many people who couldn’t do this job. ‘From Good to Great’ author Jim Collins agrees – he says that companies with charismatic CEOs end up failing or being mediocre more often than not. Companies that succeed are usually those that have a CEO who was appointed internally, had worked at the company for many years and had a high level of skills and industry knowledge.
If you’re a shareholder of a company, take a look at your CEO and board of directors. If they resemble the high flying, money grabbing, boys club members like those of General Motors, then you should beware. Hold the board accountable for their salaries, their decisions and their leadership – remember it is YOUR money that’s paying their bonuses and paying for their decisions. If they don’t shape up, speak up at the AGM. Or vote against them by selling your stocks and buying stocks in companies that do have strong, hard-working management teams.