Just Win, Baby
What to do about overpaid CEOs
Justin Hartfield, for the editors

In the sports world, history makes a distinction between average coaches and legendary coaches. There are some coaches, like John Wooden or Bill Parcells, who seem to win regardless of the all the perceived negatives that surround them. Despite not always having the best talent, or the access to the most money, or the best situation, they find a way to put up winning and even championship seasons.

These legendary men stand in contrast to other coaches who, despite having a tremendous amount of positive resources, can't seem to put together a consistent contender. Oftentimes, these average coaches have a personalized "system" that they have developed over the course of many years. These average coaches insist on adhering to their system, despite the fact that their actual personnel may not be the best fit for their particular strategy. (See, e.g., the failed integration of Michael Vick into the West Coast Offense, or Clinton Portis into Joe Gibbs's H-Back Offense.) Quite simply, the average coach has an inability to gauge the real-world relationship between his own ideas, strategies, and techniques, and the success of the team.

Much like sub-par head coaches, the CEOs of many large companies exist in a similar state of ignorance, and is predominantly due to the overinflation of their executive salaries. Recent evidence of excessive executive pay abounds. For one example, the CEO of Blockbuster, John Antioco, is in the process of suing his company because he did not receive his entire $6 million dollar bonus. While Mr. Antioco is pursuing this compensation, his "leadership" has left the company with record losses and competitive disadvantages being exploited by industry-leader Netflix.

Even as executive salaries are skyrocketing, managerial and labor job salaries (adjusted for inflation) are as low as they have been since 1973. This relative financial disconnect is not due, as we've shown, to a failure of the American Dream. It's due to the excessive, unchecked compensation of sub-par leaders.

Certainly, the most important and visible jobs in the company deserve the most pay, and success is rightly rewarded when it is achieved. But the amount of pay currently being handed out to many of America's top executives is instead causing them to be less effective leaders. One should never be handsomely compensated for failure, no matter their executive title.

Good leadership essentially boils down to the ability to motivate the masses, combined with the skill to solve problems efficiently. Paying disproportionate sums of money to executives, in any case, is counter-productive. How can a Captain lead his ship through troubled water if he doesn't have an intimate knowledge of every single aspect of the ship's mass, sail and hull? Likewise, how can a CEO evaluate his own ideas, strategies, and performance when he is paid richly, even in gross failure?

The contention that personal profit is the holy grail of market ambition is false and delusional. Capitalism should be about making one's own dreams and aspirations come to fruition. It should not be about mega-amounts of cash and stock options, or hiking themselves up to the top of the corporate mountain, eating and discarding one's "friends" along the way. In fact, the classic Horatio Alger protagonist often picked up his friends and utilized their talents on their mutual rise to the top. At the end of the book, the hero isn't barricaded in his mansion with his money clutched in his fist and dreams of world domination. Instead, he is enjoying his ability to live freely with his friends and family who were along in the journey since day one.

While it's easy to point to individual cases seemingly excessive compensation, it is impossible to establish a bright-line rule for the purposes of federal regulation. Socialists who seek to impose absolute regulatory caps on executive salaries simply do not understand the immense value that a uniquely talented CEO (see Jack Welsh) can provide a company in the globalized economy.

In the NFL, a coach like Bill Cowher may be worth every dollar of his multi-million-dollar salary, while someone like Steve Spurrier (who was paid much more) was merely an extremely expensive method to create a disappointingly mediocre team. It is up to the individual teams to decide whether a head coach's performance is worth the money. After all, they are the ones who are losing.

Similarly, the solution to ballooning executive salaries in business is, as usual, market competition. More and more successful companies, such as Whole Foods Market, are already actively capping their executive salaries at a much more fair ratio of 14 to 1. The public should be duly educated about the executive compensation issue, so they can make investments and purchasing choices with a company's compensation policy in mind. Activist investors should also make a sustained effort to lobby and support companies that reasonably cap the salaries of their executive officers.

The market should thus continuously encourage those companies with the vision and integrity to know their own value. Certainly, competition will help to shine the light. A company with a Steve Spurrier at the helm, history shows, is always bound to lose in the end.

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written by Grant, October 06, 2008

I think companies should pay their CEOs whatever they please. If they deem the services of a particular person to be that valuable, then go ahead. If it turns out that the CEO didn't add the kind of value they wanted, then they pay the price, and hopefully they'll learn better. If they don't learn better next time, then someone else will and the company will be out-competed. That being said, some of the super high CEO pay can be attributed to the need for companies to attract new talent from a small pool of people with experience in running giant multinational corporations. While it may be more prudent to pick new leadership from within a company, sometimes new direction is needed, and these companies might actually be paying market value for a savvy CEO given the small supply and huge demand.

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