What’s It Worth to You?
How much is a CEO worth? What is appropriate compensation for the leader of a large and complex organization? One frequent reply has been “Let the market decide.”
The “market” apparently decided that Lehman Brothers CEO Richard Fuld was worth nearly $500 million over the eight years during which he was leading a once-mighty firm into bankruptcy. Markets don’t always get it right, we now know. Nor do company boards when they determine CEO compensation, as HBS professors such as Jay Lorsch, George Baker, Brian Hall, Rakesh Khurana, and Fabrizzio Ferri have written about extensively.
Is there an ethical component to compensation and, if so, does it matter? General David Petraeus, who holds a doctorate from Princeton, oversees wars in Iraq and Afghanistan, is responsible for the lives of tens of thousands of war-zone servicemen and women, and is himself frequently in harm’s way. Yet his compensation is $180,000 a year, what Lehman’s Mr. Fuld used to make in about ten hours of work. By that yardstick, Petraeus arguably deserves $180 million a year, but could he lead his troops successfully if he earned that? The market also says a police officer on average is worth $50,670 a year and a firefighter $44,130, despite the fact that they, unlike the rest of us, are expected to give up their lives, if necessary, to do their jobs.
CEOs often talk about leadership and values, but can a CEO who espouses a values-oriented leadership philosophy also accept excessive compensation? Leadership and values are underpinned by morality, but excessive compensation is imbued with immorality because it implicitly devalues other human beings. A CEO like Max De Pree of Herman Miller understands (as does the military) that a true leader cannot so distance himself from those he would aspire to lead. That’s why De Pree capped his compensation at twenty times what his company’s lowest-paid employee received.
Kenneth Feinberg, the 9/11 special master, eventually came to understand that “all lives should be treated the same.” That’s because a 9/11 widow asked Feinberg why he had demeaned the memory of her husband, a fireman who died at the World Trade Center, by judging him to be worth less than a banker. (A few years later, as special master after the Virginia Tech massacre, Feinberg compensated all victims equally.)
Shouldn’t CEOs who would claim the mantle of “leadership” answer to a higher standard than professional athletes, entertainers, and other excessively compensated individuals who are in it just for themselves? Leadership is an honorable calling, not a cash cow. Excessive compensation and ethical, values-based leadership — can the twain ever meet?
Your Comments
"markets don't always get it right" that's rich (and typical of the flippant, irresponsible attitude that your fine Alumni use to justify their criminal negligence). Markets didn't create this economic debacle, people did, with many of your backslapping, fratboy, rapacious, immoral, greedy MBA (NOT)-so-Smart Guys at the helm. CEO's are NOT entertainers or athletes, they are (criminally overcompensated) HIRED HELP, who work for the STOCKHOLDERS (usually having done NOTHING to create anything--conversely they are generally ladderclimbing yes-men that "work" the corporate systems to every advantage). The "myth" that these fine MBA's are somehow superior to ANYONE with a highschool education has been proven wrong for a very long time to come. And now we taxpayers are paying for their outlandish "rewards"-- for their key role ruining the entire world financial system (is that a class they teach at that fine Ivy League institution??) Your fine institution needs a few more classes on business ethics, and likely test the IQ of these "really smart guys". Harvard MBA's -- the whole WORLD loathes them and their ilk now.
The excuse of 'let the market decide' is becoming increasingly unpopular by the day. In light of recent allegations of abuse and excess it does not seem to be the right path. Income dispersion to this degree seems utterly wrong and difficult to defend. Small Businesses and average households are feeling the pinch and ask the obvious about corporate excess - why?
As a follow-up to my post, I would like to add that the discourse in the country at the time is extremely polarized between 'left' and 'right' and 'have' vs 'have not', etc. What especially concerns me is that we've just been through a dividing Presidential election that we haven't seen in a generation and now it seems that the "class war" is expanding at an alarming clip, now focused on the have-nots and the "greedy, corporate" CEOs, Wall St. Executive, Auto Executive (fill in the blank). I am a business broker who works on the fault line of the 'us against them' mentality (I am considered to be one of "them") and I encounter this attitude more and more - and it's concerning.
Thanks Garry for your post. The arguments in this post are however built on the premise that monetary value is the only value that drives markets. I believe markets are driven by all kinds of considerations other than money. Markets are driven by what we value as human beings. General David Petraeus is in his current position because he values the power and sens of accomplishment that his current position gives him and not because of the $180,000 annual salary. I am sure he could easily get a much higher salary had he pursued a more lucrative career path. In my current position selling businesses I can see that small business valuations are not only driven by financial profits but also by all other considerations that the business to be sold can provide to potential buyers. Some business are more "sexy" than others and sell for higher multiples of profits.
Depends.
CEO/Founder who starts a company from scratch, builds it with everything he has, and turns it into a successful powerhouse I feel deserves more compensation than an "appointed" CEO.
I completely agree Shaun. A CEO/Founder would definitely have more of a compensation claim than if they were just appointed.
CEOs and all other corporate officers should be paid a low salary and be given bonuses depending on their personal performance and the performance of the company for which they are responsible. Even professional athletes get bonuses over time based on their tenure with the teams they play for.
The economic explanation for sky-high CEO pay does not justify it socially or morally. It only means that investors think CEOs are worth it. As citizens, though, most of us disapprove.