Excessive CEO Salaries Based On Confidence Rather Than Performance


And here you have the explanation for one of the many sordid features of the early twenty-first-century public spectacle… outsize CEO salaries. They are the bright feathers of the high-ranking male.

Top business leaders have become like sports heroes, but without the talent. You need not have any real knowledge of the business you are getting into, or, as Bernie Ebbers demonstrated, any real knowledge about business of any sort. What will get you a job as a leader in the corporate world is the same thing that will get you a woman in the mating game-outsize confidence.

Human life-apart from the obvious physical aspects-is largely about what scientists call “impression management.” A man with a good line of talk and a confident air about him gets almost anything he wants, and that includes the CEO job at a major U.S. corporation.

Psychologists have done studies to that effect. A man who is confident beyond his merits is much more likely to succeed than one with a modest assessment of his abilities. The modest man will, of course, usually be the better choice-his modesty is usually based on a reasonably accurate view of his skills and the challenges he faces.

The immodest bluffer, on the other hand, is almost certainly a fool and likely a menace as well. He misjudges the situation in front of him and imagines himself the master of it. But shareholders – as well as voters – have no real way of knowing who will make the best leader, so they actually tend to prefer the tall, confident, incompetent one. But if you are not tall, do not worry. Sometimes they will take a short, confident, incompetent manager, if they have to.

Then you may worry-what if the company doesn’t do well?

Well, what if? Again, recent history shows us that you can fail miserably in corporate America and still leave with a lot of money. In 2005, after being ousted as CEO, Carly Fiorina got $42 million from Hewlett-Packard. Scott Livengood got $46,000 per month consulting for Krispy Kreme, the doughnut company he glazed with losses. Franklin Raines got booted out of Fannie Mae, but still gets $114,000 per month in pension benefits. Harry Stonecipher fooled around on the job and gets $600,000 a year in retirement benefits.

In 2003, General Motors’ CEO Rick Wagoner got a salary hike, to $2.2 million, while guiding the company to its biggest loss in a decade. No matter what you do, apparently, the money keeps on coming. The Washington Post reports that executive bonuses alone at 100 big companies rose by more than 46 percent in 2004, to an average of more than $1.14 million, according to a study by Mercer Human Resource Consulting.

Or take another study, by professors at Harvard and Cornell that found that CEO salaries at companies in the Standard & Poor’s 500 index rose almost three times over 10 years, to an average of $10.3 million in 2002. Between 1998 and 2002, executive pay accounted for 10 percent of total corporate profit. Although average executive pay fell slightly in 2005, it is still up from 1990 by 300 percent, rising faster than the stock market or corporate profits.

But perhaps that was just the market rewarding CEOs for superior performance? Well-consider this: According to one study, if you had put $10,000 into the stocks of companies with the highest CEO salaries of the previous year from January 1991 to December 2004, you would have ended up with only $8,079, while the same money invested in the S&P 500 would have returned you $48,350-that is, six times as much.

And one group of CEOs is making out even better than the rest. In the first four years after 9/11, the CEOs of the top 34 defense companies have made a total of $984 million (an average of $7.7 million a year each), their pay rising 108 percent in that period, compared to 6 percent for other CEOs. Responsibility for the war, you say? Would they be 44 times more responsible than a general with 20 years of experience (paid $174,452 in 2005) or 308 times more than an enlisted soldier (paid $25,085) or 19 times more than even the commander-in-chief (over $400,000) himself? Anyway, being responsible for the war effort doesn’t seem to be much on anyone’s mind.

Take George David of United Technologies Corporation (UTC), the highest paid of them all (more than $200 million between 2002 and 2005, with a peak total pay of $88.3 million in 2004). Right now, his main concern seems to be suing the Pentagon to keep information about alleged difficulties with his Black Hawk helicopters out of the public eye.

At this point, we have to ask a simple question. Why would you pay a man $90 million to be a corporate bureaucrat? Couldn’t you find others to do the work for less? Only a reckless madman would throw money around like that. The country must be full of them.

Why so many? Why is there a blockhead on every corner?

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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