Commentary and Compensation and Leadership and Opinion and Business Topics and Corporate boards and Viewpoint

GUY: What price company leadership?

June 29, 2009

A popular hypothesis is that competition for executive talent requires promise of high compensation. Another is that CEOs are worth it.

These assumptions are ubiquitous, because boards are made up of highly compensated executives who accept as true that they are worthy of high compensation, and, therefore, should pay others well. Their compensation decisions are painless, because board members spend other people's money, shareholders' money.

An example of self-interested opinion appeared in a Feb. 5 The New York Times op-ed, in which the writer said:

"... picking the wrong chief executive is an enormous disaster, so boards are willing to pay an arm and a leg for already proven talent. [Proposals to put] limits on the salaries at public companies, or trying to shame them into coming down, won't stop this costly competition for talent."

The writer was Reed Hastings, CEO of Netflix, declaring self-confidently that his talent justifies high compensation.

No study has proven the economic value of executive talent. No study has shown a consistent relationship between compensation and gross sales, earnings per share, growth of earnings, introduction of successful products, or improvement in stock price. No research has demonstrated that a successful, "proven" talent at one company achieves similar success when hired by another.

No one has proven, or demonstrated by example, that attracting "talent" is a function of compensation, or that the hiring process and offer of compensation took place in a competitive environment in which two or more companies were bidding for the services of a theoretically attractive candidate. Unlike free agents in sports, no executive appears to have been lured to one company, instead of another, by promises of high income, nor has his/her services been auctioned on eBay. The competition argument does not hold water.

Some argue that CEOs are not important for performance. Are linemen the most important people for an electric utility? What about research scientists at Merck, the imaginative animators at Disney, or the inventors of Oreos? Has history proved that the founding CEO of Conseco Inc. ever was worth $100 million in a single year? In 2000, was the Conseco board justified paying a signing bonus of $45 million to Gary Wendt, plus other benefits potentially adding up to $100 million, to lead a company that soon went bankrupt?

Could it be that the finest and most enduring contributions to society are made by people who are not highly compensated, such as ministers, teachers, professors, composers, reporters, historians, artists and statesmen? Does the imagination recognize a possibility that high compensation is negatively correlated to results because recipients become more concerned about money and status than about personal accomplishment?

Leadership is a unique and valuable talent. No organization can exist without it. But what is leadership worth? Rarely is the contribution of a CEO recognized in history (unless his name is inscribed on a building). Instead, society remembers leaders who campaigned for their jobs, and performed transparently, in public, every day.

Statesmen, such as governors and presidents, are the most talented leaders. Certainly, their responsibilities are greatest, but the governor of Indiana receives $95,000, far less than income received by people on the list of CEOs in last week's IBJ. A reason the governor is paid relatively little is that his salary is approved by legislative bodies, which are directly and publicly responsive to their shareholders, the voters. For the opportunity to earn $95,000 a year, the governor must campaign for a year or more at a cost of millions, funded voluntarily by people who think he is a good fellow.

Vilifying is easy. Change is difficult. In a free market, regulation or tax disincentives will not do the job. President Clinton tried by limiting tax deductibility of CEO pay to $1 million. The result was new compensation methods not defined as salary. No, the answer must come from board members. They must accept that their self-dealing, self-benefiting is an insult to the social structure of our nation.•

Guy is an Indianapolis money manager, certified financial planner and president of Wealth Planning & Management LLC.

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