Forbes presents a run-down on CEO compensation. There’s been a lot of talk about CEO pay over the past couple of years, but I think Forbes’ rather novel approach to the issue is a good one. Rather than asking flat-out whether CEO’s are overpaid, why not compare how they are paid relative to how much value they are bringing the companies they lead?
[T]he most effective CEO of all was Marc Benioff of Salesforce.com, the San Francisco-based cloud computing company. Over the past six years he has been paid an average of $200,000 a year while delivering a 41% annual return to shareholders. The least effective: Gregg L. Engles of Dean Foods. His paycheck has averaged $20 million a year over the past six years, while his company’s average return has been -11%.
Arguments about whether executive compensation is excessive always hinge on the question of how much value a given executive brings to the organization versus how much he or she is being paid. “We have to pay this much,” the argument goes. “This is the individual we need in order for our business to succeed. If we don’t pay, someone else will.”
Juxtaposing CEO compensation with company growth is the perfect way to validate (or invalidate) that argument, depending on the CEO under discussion. It’s the CEO batting average. Right now if you’re on the board of SalesForce.com you’ve got to feel pretty good about how prudently you have been investing your CEO dollars. You’ve got a slugger and you’re paying him like a rookie. On the other hand, the board at Dean Foods has got to wonder how long they’re going to have to so lavishly subsidize their hitter’s slump. Plus, one would imagine that both Engles and Benioff would benefit from knowing where they stand (although, granted, Engles might wish the whole thing was never brought up.)
Baseball players have always lived (and died) by basic statistical measures of performance. Batting average, earned run average, on-base percentage, number of pitches, speed of pitches, number of walks, number of strikeouts. Increasingly, in an age when collecting and analyzing data has become so pervasive, we can expect these kinds of measures applied increasingly to…everybody.
It won’t just be CEOs.
Soon we’ll all have measures not only of our contribution, but things like our compensation versus years of experience. We’ll be able to compare where we are in our careers versus others with the same experience, or the same job title, or the same education, or who live in the same region. Everyone will have not only a batting average, but a whole collection of figures related to their overall career performance and effectiveness.
As with Engles and Benioff, some of us will probably like the ubiquity of those kinds of numbers more than others. But the clarity and benefits they’ll provide across the board makes their eventual widespread availability just about inevitable.
Pingback: Instapundit » Blog Archive » PHIL BOWERMASTER: In The Future, Everyone Gets A Batting Average….
Sometimes a company does well even though it is badly run because it just happens to be in a growing market. Sometimes a company does badly despite good management because of the economic and business climate. It is not always easy to quantify. A simple-minded measure like revenue growth can mislead.
Even in baseball, statistics don’t always reflect actual performance. Sabermetricians recognize (and try to eliminate) “park effects” (Coors Stadium, Wrigley Field, and Fenway Park favor batters; Tropicana Field favors pitchers.)
But baseball players’ circumstances are far more uniform than those of business executives. An executive’s performance may not be good, but it may have been the best possible performance in the circumstances: if the industry was hammered by broad economic conditions, or natural disaster. Contrariwise, apparent success may be due more to accident than anything contributed by the executive – he may even have botched the exploitation of favorable conditions.
Construction of accurate performance metrics is a very difficult task. Sabermetricians have devoted vast efforts to creating accurate metrics in baseball, and despite the wealth of precise statistical data to work from, there are no universally accepted measures yet.
There is certainly no perfect way to judge CEO compensation. There is no perfect way to judge employee performance at any level, probably one reason my employers have all tended to adopt a new employee review process every year or two.
On the other hand, there are definitely overpaid bad CEOs (and low paid good ones). I think much of the resentment of CEO pay comes when a bad CEO is removed or even fired with cause and still walks away with more than his last 2-3 year’s compensation while the rest of us get nothing (fired for cause) or perhaps a couple months severance (just laid off).
To add a bit more context, it’s important to note that as the founder of Salesforce, Benioff has sold off some of his shares of the now public company I’m guessing somewhere in the $100 million range. He can afford to pay himself less. Not that there’s anything wrong with that, of course!
What part of CEO do you not understand? The boss is responsible for performance.
Its like you read my mind! You seem to know a lot about this, like you wrote the book in it or something. I think that you could do with some pics to drive the message home a bit, but other than that, this is splendid blog. An perfect read. I’ll definitely be back.
“What part of CEO do you not understand? The boss is responsible for performance.”
So what is the board of trustees responsible for? How about all the vice presidents? The CIO, CFO, CTO, etc.? All of whom, incidentally, are very well paid.
The whole point of a corporation is that it isn’t just one person.