Monday, April 26, 2004

CEOs and the Cult of the Super-Genius

Title: Why Are CEOs Paid So Much?
Source: Capitalism Magazine
Date: April 16, 2004

The article states the facts about CEO pay in this way:
    In 2003 the average pay for CEOs at 200 of the largest U.S. companies was $11.3 million--but there are a good number whose compensation packages approach the $100 million mark.
You can find numerous examples of this level of compensation by reviewing previous entries in this blog.

The article then asks rhetorically, "Are CEOs worth this much?" And it answers in the affirmative. Yes, according to the article, CEOs are worth this much because every CEO is a Super Genius.

The author states it this way:
    In order to be successful in the long range, the CEO's strategy must encompass countless factors. He must devise a plan to grow the business in the face of competitors, not only from within the United States but from any and every region of today's global economy.

    The CEO calls the plays for a team of tens (and sometimes hundreds) of thousands of workers. All of the actions of every employee and every aspect of the business must be coordinated and integrated to produce the cars, computers or CAT scanners that yield profits to the company.
It sounds impressive, doesn't it? It is, in fact, total illusion. This belief in the omnipotence of CEOs is the Cult of the Super Genius. This cult is one reason why CEO (and all other executive) compensation is spiraling out of control right now.

Are CEOs Super Geniuses? The simple answer is: no. CEOs are normal human beings. And it is easy to prove it. Here are three examples:
  1. If CEOs truly were Super Geniuses... If CEOs really were intimately involved in the coordination of "tens (and sometimes hundreds) of thousands of workers"... If, in reality the "CEO's strategy must encompass countless factors"... then the loss of the CEO would be catastrophic. The loss of such an omnipotent and all-seeing Super Genius would be a crushing blow to any corporation.

    That definitely is not the case.

    For example, last week the CEO of McDonald's died of a heart attack. Did the company collapse? Did the restaurants suddenly stop selling hamburgers? Of course not. He was quickly replaced and the company continued selling hamburgers just as it had before.

    Another example can be found in this post. MBNA got tired of its highly overpaid CEO and forced him out. The company was actually better off as a result.

    The same thing is happening at Disney right now, as it tries forcing Michael Eisner out.

    The fact is that any corporate CEO could die tomorrow, and it would have no effect on the business. Would Microsoft detonate if Gates or Balmer died? No. Microsoft would keep writing and selling software. Would Starbucks detonate if Schultz died? No. Starbucks would keep making and selling coffee. Would eBay detonate if Whitman died? No. People would continue to buy and sell Pez dispensers on eBay. In each case, the dead CEO would be replaced and life would go on. In many cases (e.g. MBNA and Disney), life would go on better than it had before.

  2. If CEOs were Super Geniuses, they would not make such stupid mistakes.

    Martha Stewart was a CEO. Is she a Super Genius? If she was a Super Genius, how do you explain her current position?

    What about Jack Welch (former CEO of GE), his highly publicized affair and his subsequent divorce? If he is a Super Genius and a Super Manager, then why could he not manage his marriage and its dissolution?

    Donald Trump is a CEO. Is he a Super Genius? Not according to this article, which says:

      "Consider his gambling business, Trump Hotels & Casino Resorts. It lost $87 million in 2003. In 2002, it settled charges with the Securities and Exchange Commission involving overstated earnings for 1999. The company's stock has been drifting down since 1996, from a peak $34 a share to $2.26 a share on Friday. Trump's auditors have warned that without new financing, the company, which has $1.8 billion in debt, could be flirting with bankruptcy."

    Does that sound like a Super Genius to you?

  3. If CEOs were Super Geniuses, companies would never fail. Look at the huge list of companies brought to their knees by their CEOs and executives in the last three years. Worldcom and Enron are two great examples, and there are dozens of others. The fact is that most fifth graders could have done a better job than the CEOs of Worldcom and Enron. Had these companies been operated by fifth graders instead of corrupt Super Geniuses, these companies would not have suffered such devastating losses.

    What about the hundreds of Internet companies started during the Internet bubble? Space.com, Pets.com, Furniture.com, etc. etc. They all had tens of millions of dollars and Super Genius CEOs -- why did they all crater? Because these guys are not omniscient Super Geniuses. They are normal, fallible human beings.
There is one other thing to consider. In many cases, if a CEO were replaced, the company would do significantly better. Take as an example Steve Jobs of Apple. Is Steve Jobs really worth $75 million? Is Jobs the right person for the job? Could someone else do better?

Think about where Apple was in 1984. In 1984, Apple is selling the top home and educational PC -- the Apple II. IBM has started to invade Apple's space with the IBM PC in 1982. In 1984, Apple stuns the computer world with the release of the Macintosh computer. This is the first mass market GUI machine. It brings windows and mice into the mainstream. Apple is the first mover and has a gigantic lead on the competition. It will be nearly a decade before Microsoft has a product that can successfully compete with the Mac in the GUI space.

Apple today could be a behemoth. It could be as large as Microsoft and Dell combined. The same could be said of IBM -- how did IBM create and then lose the PC marketplace? The same could be said of Microsoft -- why didn't Microsoft see the hardware opportunity and create the equivalent Dell alongside its software offerings? If any Super Genius had actually existed, he/she would have been able to foresee what would happen in the PC/OS marketplace and fully capitalize on all of the value in that marketplace.

Today Apple is a marginal player rather than a behemoth. How much better off could Apple be today if Jobs had died? It is, of course, impossible to say. But the fact is that Apple now holds only 3% of the GUI market it created.

CEOs are not Super Geniuses. They are fallible, replaceable, normal human beings. In any company containing thousands of employees, no single person makes or breaks the company. No single person is indispensable. No single person is worth $100 million, or even $10 million. The easy proof of that assertion is that the CEO of any corporation can die and the corporation will continue (and often do better).

The sooner we end the cult of the Super Genius and cut CEO/executive pay by several orders of magnitude, the better off (and more competitive) corporate America will be. Today's CEO compensation is seriously off-track, in part because of the cult of the Super Genius.

1 Comments:

At 5:37 AM, Blogger Ethan Smith said...

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