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The CEO is important but they are only one person. Rarely do they determine the success of a company. The instances where they seem to are so rare as to almost seem like just random luck. I think they can make a difference, but that they make a significant difference rarely. Steve Jobs seems to have made a huge difference to Apple, for example (and Jeffery Bezos at Amazon – note both of these examples are also founders of the company). Jason Zweig has a good article on Why a New CEO Isn’t Always a Panacea
If you took the CEOs with the best track records and brought them in to run the businesses with the worst performance, how often would those companies become more profitable? According to economist Antoinette Schoar of Massachusetts Institute of Technology’s Sloan School of Management, who has studied the effects of hundreds of management changes, the answer is roughly 60%. That isn’t much better than the flip of a coin.
“Some people,” Prof. Schoar says, “may have this almost blind belief that the manager at the top changes everything. Our results show that managers do matter, but they don’t change everything.”
Since the 1970s, several other studies have measured what happens when companies bring in new bosses. Most of the findings have been consistent: Changes in leadership account for roughly 10% of the variance in corporate profitability on average.
…
a company will be much more inclined to replace the CEO after a run of bad losses—and to bring him in from a firm that has been on a hot streak. That leads to an illusion: “You change the CEO,” Dr. Kahneman says, “then performance reverts to the mean, and you attribute the improvement to the new guy.”
Furthermore, the hot profits at the new CEO’s former company are likely to cool off—by regression to the mean alone. When investors see that, they will mistakenly conclude that he is such a good boss that his old firm can’t thrive without him.
The management system is far more important than one person. Jim Press, Toyota N. American President, Moves to Chrysler (don’t expect much – Sept 2007). We are often fooled by randomness (understanding psychology lets you know this truth and factor it into your thinking): Illusions – Optical and Other, Attributing Random Results to a Special Cause, Seeing Patterns Where None Exists.
CEOs like to think they are royalty and take huge amounts of money from the company’s treasury, as a way, they hope, of providing evidence of this false belief. Don’t be fooled.
Jason Zwieg is the editor of the last few issues of the Intelligent Investor where he adds commentary on Benjamin Graham’s classic.
Related: Narcissistic Cadre of Senior Executives – CEO’s Given Lottery Sized Payouts – Diversification not Dazzling in Investing – Tilting at Ludicrous CEO Pay 2007 Edition
Henry Mintzberg, wrote an excellent article for the Wall Street Journal today, No More Executive Bonuses!
This may sound extreme. But when you look at the way the compensation game is played – and the assumptions that are made by those who want to reform it – you can come to no other conclusion. The system simply can’t be fixed. Executive bonuses – especially in the form of stock and option grants—represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy. Get rid of them and we will all be better off for it.
…
So, again, there is but one solution: Eliminate bonuses. Period. Pay people, including the CEO, fairly. As an executive, if you want a bonus, buy the stock, like everyone else. Bet on your company for real, personally.
…
All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit.
Too many large corporations today are starved for leadership – true leadership, meaning engaged leadership embedded in concerned management. And the global economy desperately needs renewed enterprise, embedded in the belief that companies are communities. Getting rid of executive bonuses, and the gambling games that accompany them, is the place to start.
It is an great article on bad pay systems that let a few top executives (and their hand picked board members) in many companies to loot the treasury of the company. I have written about this problem many times, including: CEOs Plundering Corporate Coffers – Excessive Executive Pay (2005) – Narcissistic Cadre of Senior Executives – The Best Leadership Is Good Management – Another Year of CEO’s Taking Hugely Excessive Pay – More on Obscene CEO Pay – More on Failed Executives
There are executives that don’t act like corrupt dictators looting their country, unfortunately they are less common than those that act like looters. And they all seem to have built cultures that taking respect for people is more important that feeding a few bloated egos. Akio Toyoda’s Message Shows Real Leadership, Tony Hsieh, the Zappo’s CEO – Warren Buffett – Honda has Never had Layoffs and has been Profitable Every Year
The obscene pay is not just a matter of people taking a tens of millions of dollars they don’t deserve. Companies whole management systems are distorted in ways that lead the company to risk all the other stakeholders future for the potential gain of a few senior executives.
Where are the Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Subsequent Company Performance by Crocker H. Liu, Arizona State University and David Yermack, New York University – Stern School of Business
That we put in power CEO’s that see themselves as nobility with the right to build castles (and many of these CEO castles dwarf all but the most conspicuous castle built by nobility) by taking the wealth produced by others from corporate coffers is a sign of our failure to select acceptable leaders for companies.
Related: Another Year of CEO’s Taking Hugely Excessive Pay – Excessive Executive Pay – Exposing CEO Pay Excesses – Narcissistic Cadre of Senior Executives – 9 Deadly Diseases
When Economic Incentives Backfire by Samuel Bowles, Sante Fe Institute
Punished by Rewards, by Alfie Kohn, is a great book on this topic. The area of “motivating” employees is one it is often hard for managers to learn. Even managers that have been studying Deming, Ackoff, Ohno… for years still have trouble with the idea that trying to find the right incentive scheme to motivate the right behavior is the wrong approach. Read the The Human Side Of Enterprise by Douglas Mcgregor (in 1960) to re-enforce the understanding of human motivation provided by Toyota’s respect for people principles.
Managers need to eliminate de-motivation in the work systems not try and find bonus schemes to motivate behavior. Eliminating de-motivation is often much more work. You can’t just get some money from the bonus pool and start giving it away. You have to manage. But if you are a manager you shouldn’t be afraid to actually manage the system and make it better.
Related: “Pay for Performance” is a Bad Idea – Reward and Incentive Programs are Ineffective — Even Harmful by Peter Scholtes – The Defect Black Market – What’s the Value of a Big Bonus? – Problems with Bonuses – Losses Covered Up to Protect Bonuses – Stop Demotivating Employees
In yet another voice against the looting mentality of the current crop of executives Chris Bones, dean of Henley Business School writes a A crisis of confidence?
It really is a shame that the executives leading so many companies are so moral, ethically and managerially bankrupt. We need to stop allowing such people to become executives in organizations. With such fundamental problems in their basic understanding of human systems the correct solution is to stop allowing such flawed people to have power not to try and convince such flawed people to behave responsibly.
That executives believe they should act as royalty taking what they wish from the value produced by others is so fundamental a failure that I do not believe reform is the best solution. They should just be removed. If you are lucky some competitor will hire them and you can gain not only from their removal but from the damage they cause your competitor.
Related: Warren Buffett on Excessive CEO Pay – Honda Executives not Overpaid – Unconscionable Executive Pay – Tilting at Ludicrous CEO Pay 2008 – Looting: Bankruptcy for Profit – More on Obscene CEO Pay
I continue to do my part to publicize the abusive CEO pay packages that the current crop of unethical CEO’s, and those sitting on corporate boards have supported (Tilting at Ludicrous CEO Pay 2008 – 2007 post on CEO pay abuses). It does seem there is more anger now at the looting these corrupt CEOs have engaged in; though far too many people seem to think the corruption is some isolated few CEO’s. The widespread failure of ethical standards by an enormous number CEO’s (those taking from corporate treasuries as though it was their own personal bank account) is the problem (not a few individuals). The looters certainly have littered their “courts” with apologists for their egregious behavior. Even with the large amounts they pay such lackeys I am surprised they find such willing apologists, in such large numbers.
| 2007 pay rank |
Company | CEO | 2008 Pay | 2007 Pay | CEO % of 2008 Earnings | total employees |
|---|---|---|---|---|---|---|
| 1 | Motorola | Sanjay Jha | $104,400,000 | company lost $4.2 billion | 64,000 | |
| 2 | Oracle | Lawrence Ellison | $84,600,000 | $61,200,000 | 1.5% | 86,600 |
| 3 | Walt Disney | Robert Iger | $51,100,000 | $27,700,000 | 1.2% | 150,000 |
| 4 | American Express | Kenneth Chenault | $42,800,000 | $50,100,000 | 1.6% | 66,000 |
| 5 | Citigroup | Vikram Pandit | $38,200,000 | company lost $27.7 billion | 322,800 | |
| 6 | Hewlett-Packard | Mark Hurd | $34,000,000 | $26,000,000 | 7.4% | 6,200 |
| 7 | Calpine | Jack A. Fusco | $32,700,000 | 327% | 2,000 |
This executive pay data is for 2008, from the New York Times article, Pay at the Top. Earnings and employee data for 2008 from Google Finance. I would not pay any of these guys 1% of what they were paid if I owned the company, myself.
These guys and their friends have created a culture where their looting is as accepted as the clothes the emperor is not wearing. We need to wake up and stop letting these people steal the bounty created by the employees, customers, community, suppliers, investors… They want a world where they can behave like nobility – taking whatever they want from the value created by others. And lately they have succeeded in creating such a world. They leave in their wake very weakened companies and societies.
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Looting: The Economic Underworld of Bankruptcy for Profit by George Akerlof, University of California, Berkeley; National Bureau of Economic Research (NBER) and Paul Romer, Stanford Graduate School of Business; National Bureau of Economic Research (NBER). George Akerlof was awarded the 2001 Nobel prize for economics. This is the abstract to their 1994 paper:
In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds.
Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.
That is exactly what has been happening. People that are not honorable and are given huge incentives to risk the future of all the other stakeholders for immense personal gain will do so.
via: New York Times Pulls Punches On Wall Street Bubble Era Pay
Related: CEOs Plundering Corporate Coffers – Obscene CEO Pay – Why Pay Taxes or be Honest – Tilting at Ludicrous CEO Pay 2008 – Excessive Executive Pay
Nice webbast of CNN clip on Japan Airlines CEO cutting his pay to less than that of the pilots. He really seems to understand the company does not exist for him to plunder (unlike so many CEOs in the USA).
Related: Japan Airlines using Toyota Production System Principles – Under Nishimatsu, Japan Airlines Tries to Rise Above Legacy – Respect for Employees at Southwest Airlines – posts on executive pay – Honda executives not overpaid either
Engineers Rule, 2006
I checked and Honda was also profitable in 2007 and 2008 fiscal year (ending in September) and no I see no evidence of any layoffs this year (when I look online).
Related: Honda Engineering – Back to School for Honda Workers, 1993 – The Google Way: Give Engineers Room – Google’s Ten Golden Rules – Toyota as Homebuilder – Curious Cat Science and Engineering Blog – Toyota’s CEO pay under $1 million
What’s the Value of a Big Bonus? by Dan Ariely
When I recently presented these results to a group of banking executives, they assured me that their own work and that of their employees would not follow this pattern. (I pointed out that with the right research budget, and their participation, we could examine this assertion. They weren’t that interested.)
This is an interesting look at an effect of bonuses. We all know monetary bonuses can influence behavior. The problem is the type of behaviors that result. Huge bonuses, for example, create huge incentives to risk the future of the company for the chance at a huge bonus for the executive. Extrinsic motivation leads to many problems.
Problems with bonuses: Losses Covered Up to Protect Bonuses – “Pay for Performance” is a Bad Idea – Problems with Bonuses – Book: Punished By Rewards: The Trouble With Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes by Alfie Kohn – posts on executive pay
I continue to tilt at the robber barron CEO pay packages (2007 post on CEO pay abuses).
| 2007 pay rank |
Company | CEO | Pay | 5 Year Pay | CEO % of 2007 Earnings | |
|---|---|---|---|---|---|---|
| 1 | Apple | Steve Jobs | $646,600,000 | $650,170,000 |
|
18.5% |
| 2 | Occidental Petroleum | Ray Irani | $321,640,000 | $509,530,000 |
|
5.9% |
| 3 | IAC | Barry Diller | $295,140,000 | $512,270,000 |
|
Company Lost Money |
| 4 | Fidelity National Financial | William Folley | $179,560,000 | NA |
|
138.4% |
| 5 | Yahoo! | Terry Semel | $174,200,000 | $432,490,000 |
|
26.4% |
| 7 | Countrywide Financial | Angelo Mozilo | $141,980,000 | $295,730,000 |
|
Company Lost Money |
| 13 | XTO Energy | Bob Simpson | $72,270,000 | $215,280,000 |
|
4.2% |
Data via: Forbes CEO Compensation (Total compensation for each chief executive includes the following: salary and bonuses; other compensation, such as vested restricted stock grants, LTIP payouts and perks; and stock gains, the value realized by exercising stock options.) and Google Finance (using 2007 earnings – Countrywide from SEC). I realize this chart could be improved by spending more time (the effect of stock options exercised in one year distorts things a bit but the excess are so massively huge that the clarity of the data does not need to be very precise).
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Dogbert: “I am stepping down as CEO so I can spend more time with the money I stole from this hellhole.” Unfortunately we still have far too few people that see the obscene behavior of CEOs and their brooks brother bureaucrats as unacceptable. The behavior of many of them has been similar to that of dictators looting the coffers of their country as the country sinks into despair. The CEOs have their actions supported by a flock of board members that are also spared the condemnation their despicable behavior deserves.
I must say I am amazed at how brazenly those participating in looting companies from within are; and how it is accepted. It is a shame such unethical behavior is tolerated. It seems once companies implode their are some minor complaints about the behavior, in the specific case in question, as though it was not the accepted current practice among the many of those in positions of power (Warren Buffett being one obvious counterexample).
At some point I sure hope those looting companies and voting to support such things are seen for what they are. And I hope we don’t make excuses about how those taking what they didn’t deserve were somehow excused because they paid large sums of money to others to say such behavior was acceptable. Undermining all those that rely on a companies long term success is despicable behavior. That we accept those doing so and those board members supporting it as honorable members of society is a sad commentary on our society. I understand they feel entitled to loot when they see their neighbors buying castles around the world and helicopters and jets and… But their behavior is despicable.
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WaMu: Skip customers; save the execs
The board decided in February to use different performance yardsticks that could make it look like Killinger and other top executives were doing great jobs — and all but ensure them millions of dollars in bonuses for 2008. Those huge losses piling up because of subprime loans and foreclosures? At bonus time, the bank will ignore them.
The behavior of executives that take what they have no right to in unjustifiable pay schemes continues to be a disgrace. Thankfully more people are shedding light on the unconscionable behavior. Excessive executive pay is both a sign of awful ethics and a driver of bad management action. I add two new diseases of western management to Dr. Deming’s 7 deadly diseases; massively overpaid executives is one.
Related: Tilting at Ludicrous CEO Pay – Obscene CEO Pay – “Too often, executive compensation in the U.S. is ridiculously out of line with performance” Warren Buffett
I continue to tilt at the robber barron CEO pay packages. Hopefully, at some point, the people approving these obscene pay packages can be shamed into stopping or replaced by people with some sense of decency. I was taught in the days of robber barrons the business world was seen as an amoral place (morality did not belong in this area of human endeavor) but that over time society decided that in fact morality did apply there. It is hard to reconcile that with the behavior of CEOs and board approving ludicrous pay packages. See previous post on the purpose of organizations. Half of S&P 500 CEOs Topped $8.3 Million
“Why is it that a CEO gets compensated in such a discombobulating fashion when the average worker gets a paycheck and can tell immediately what it’s about? … If you’re an investor and you get your (proxy) statement and it just goes on for pages and pages of the different methods used to pay the CEO, at some point you have to ask yourself why. ‘Why don’t I get all this?’”
Very good question. I would say they are intentionally trying and confuse the issue. Even as they spout defenses for such unjustifiably pay packages they know the pay is not defensible and so try to confuse the issue with byzantine explanations. Lets look at the CEO pay versus total earnings for several companies:
| Company | CEO | Pay | Earnings | CEO % | |
|---|---|---|---|---|---|
| Yahoo! | Terry Semel | $71,660,216 | $751,000,000 |
|
9.5% |
| XTO Energy | Bob Simpson | $59,489,924 | $1,860,000,000 |
|
3.2% |
| Goldman Sachs | Lloyd Blankfein | $54,300,000 | $9,537,000,000 |
|
.6% |
| Occidental Petroleum | Ray Irani | $52,822,584 | $4,182,000,000 |
|
1.4% |
| Merrill Lynch | E. Stanley O’Neal | $46,375,347 | $7,499,000,000 |
|
.6% |
| Danaher | H. Lawrence Culp, Jr. | $46,215,671 | $1,122,000,000 |
|
4.1% |
| Countrywide Financial | Angelo Mozilo | $42,994,306 | $2,674,000,000 |
|
1.6% |
| Morgan Stanley | John Mack | $41,400,000 | $7,472,000,000 |
|
.6% |
| Ford | Alan Mulally | $39,128,100 | $1,540,000 |
|
2540.7% |
| Apollo Group | Todd Nelson | $32,626,442 | $415,000,000 |
|
7.9% |
| AT&T | Edward Whitacre | $31,765,761 | $7,356,000,000 |
|
4.3% |
Data via: Best-paid CEOS (only those with fiscal years ending after December 15th – more pay data) – for 2006 according to an Associated Press analysis that covered nearly 400 of the nation’s 500 biggest public companies and Google Finance. I realize this chart could be improved by spending more time (especially looking out over several years for both pay and earnings…) but this is what I could do relatively quickly.
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The politics of pay from The Economist:
Thankfully, more of the ludicrous pay packages details are being made public and shame will force some changes (those approving these pay packages have to justify such reckless spending). Of course, some feel no shame no matter how egregious the situation. As I mentioned earlier, I would add excessive executive pay to Deming’s seven deadly diseases of western management. We need to drastically role back the luducrous pay packages.
Related: More on Obscene CEO Pay – Excessive Executive Pay – Toyota’s CEO pay under $1 million – Warren Buffett on Excessive CEO Pay – Compensation at Whole Foods – Bloated CEO salaries, subsidized by taxpayers, undermine American values – CEO Compensation: A Problem That Just Gets Worse
Study site: CEO-worker pay imbalance grows includes the graph above.
Unfortunately this reverse robin hood (steal from the workers, stock holder, customers…) and give to the CEO tale continues. Hopefully someday soon we can at least turn the momentum in the right direction (stopping these incredibly excessive “pay” packages). Even then it will take quite a deal of reducing these ridiculous “pay” packages to reach some sense of decency. CNN article based on the report: CEO Paycheck: $42,000 a day by Jeanne Sahadi:
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Topic: Management Improvement
Via Christian Sarkar, Too Many Turkeys, The Economist:
Christian Sarkar asks, can we outsource the CEO to a low-cost country? That is exactly what will happen at the ludicrous levels pay has risen to. If the United States were to lock into a payscale that is unsustainable globally US companies will be no be able to compete. My guess is plenty of people in the USA will be glad to compete against the brooks brothers bureaucrats but if not, others will.
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