Holmes Report Blog

The Holmes Report blog focuses on news and issues of interest to public relations professionals. Our main site can be found at www.holmesreport.com.

Friday, January 05, 2007

Paying a Premium: The Wall Street Journal seeks to defend Robert Nardelli’s $210 million severance from Home Depot by pointing out that most of the money he received in exchange for his departure wasn’t severance money at all, since it was guaranteed in the contract he signed when he joined the company—a distinction without any appreciable difference.

The Journal’s broader objective is to defend the extraordinary amounts paid to CEOs, which it does by claiming: “Top executive talent is hard to find, and boards are willing to pay a premium to get it. Their hiring decisions don't always work out—whose do?—but they'll pay a lot to reduce that risk.”

Spend a moment thinking about that and the argument boils down to this: CEOs are paid so much because they’re expensive.

What the Journal doesn’t claim is that CEOs who cost a lot are better than CEOs that cost only a fraction as much. It doesn’t claim that because it can’t. It can’t, because there’s absolutely no evidence to suggest it’s true.

The reality is that no one knows how much a good CEO is worth: it’s impossible to isolate the impact of the CEO from other factors—the quality of the management team, changes in the competitive landscape, global economic conditions—that affect corporate performance. It’s also pretty much impossible to predict whether a CEO who appeared to perform well in one job (perhaps because of some innate skill, perhaps because he was in the right place at the right time) will perform well in another.

Boards of directors are spending massive amounts of money based on nothing more than guesswork. It’s not even particularly educated guesswork. Top executive talent, as the Journal says, is hard to find. It’s even harder to identify with any certainty. So perhaps companies should avoid spending hundreds of millions of dollars until they know exactly what they’ve bought—any CEO confident of his own ability ought to be happy to accept a genuine pay-for-performance arrangement.

22 Comments:

  • At 4:57 PM, Anonymous adrian wheeler said…

    This kind of dislocation between pay and performance has puzzled me for some time. In a shareholder democracy, how can it happen so often?

    Maybe it's because there is also a dislocation between shareholders - you, me, and the money we funnel into our pension funds, mutual funds and insurance policies - and the companies whose shares are bought and sold by these behemoths on our behalf.

    We, the millions, are paying fund managers to make decisions over which we have no control. The only sanction we have is to switch, which is about as simple as emigrating.

    The real point is that CEOs don't need to engage with ordinary people, nor feel any sense of obligation towards them. What matters to most of them is a small group of investment managers who control the price of the stock. Or, worse, a sedentary board which is ready to wave through absurd emoluments paid for with money belonging to people they will never meet.

    I'm not happy to have my savings handled this way, so I've invested instead in businesses run by people I know, and who know me. I prefer the local bistro to The Bluebird.

    I hope I have made a good decision - but, either way, I feel better about it.

     
  • At 4:19 PM, Blogger lenmcgrane said…

    Paul, how right you are! Looking around at the commercial landscape down here in New Zealand it is obvious that a self-employed house painter can have more business success than a highly paid CEO. Each of them has (vastly) different amounts of capital to push around, but fewer painters (say) go to the wall than top-level executives of our leading companies. There is something about corporate leadership that can't be found in corporate teambuilding programs or Harvard Business School. It is character and business acumen. These are things that are instinctive, I think.

     
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