Why most CEOs and Executives are not worth their pay.
Table of Contents
Executive Compensation is an Old Ongoing Issue
In 2009, the Wall Street Journal reported that the newly appointed CEO of AIG, Robert Benmosche was done with AIG and was going to quit. At the time, AIG was on the verge of financial collapse when it received $182.3 billion of government bailout money. This action placed the company in conservatorship, which meant government overseers placed in the company oversaw salaries and expenditures. The company stabilized under this system and was expected to recover as well as repay its debt, but Benmosche cited that pay constraints were making the recovery difficult and if the company wanted to be successful it needed to pay. Under government conservatorship “cash salaries at the insurer couldn’t exceed $500,000 a year unless “good cause” was shown” Benmosche argued against these salary caps,
I am very easy when it comes to doing business, but I’m just not cheap,” Benmosche said during an Aug. 11 meeting in Houston for life insurance workers, according to a record obtained by Bloomberg. “So if you want me, you can have me, but you’ve got to pay. The money is about what I am worth, and what my job is worth to be your leader.
This situation in 2009 exemplifies an ongoing issue in which executive compensation has become a centerpiece of debate. For many people, it is difficult to justify paying multimillion dollar salaries along with bonuses, when a company is struggling or in this case – teetering on bankruptcy. The recession and collapse of financial markets highlighted a serious question in the eyes of many people as to what the return on investment is with regard to CEO pay.
The question of whether CEO pay is too high poses an interesting conundrum that seems to escape reason. One might argue why this is even a question since companies consistently measure the return on investment (ROI) of employees and their positions. However, when the ROI of an executive is challenged, this idea becomes controversial. It is difficult to understand why measuring the value or ROI of executive compensation is problematic since many glaring examples of this problem exist. For example, the cost of healthcare in the United States is staggering. The rising cost of healthcare is often blamed on a variety of factors but executive compensation is rarely considered as one of these factors. The CEO’s of large healthcare organizations continue to receive tremendous compensation packages despite rising costs and reduced services. Below is a list of the executive compensation for the largest public healthcare organizations from 2007, which are significantly larger today in most cases:
* Aetna, Ronald A. Williams: $23,045,834
* Cigna, H. Edward Hanway: $25,839,777
* Coventry, Dale B. Wolf : $14,869,823
* Health Net, Jay M. Gellert: $3,686,230
* Humana, Michael McCallister: $10,312,557
* U.Health, Grp Stephen J. Hemsley: $13,164,529
* WellPoint, Angela Braly (2007): $9,094,271
Here is another list from MedCity News of the top seven highest paid healthcare CEOs for 2021:
- Vivek Garipalli, Clover Health Investments: $389.6 million
- George Mikan, Bright Health Group: $180.8 million
- Mario Schlosser, Oscar Health: $60.8 million
- John Kao, Alignment Healthcare: $46 million
- Michael Neidorff, Centene: $20.6 million
- Joseph Zubretsky, Molina Healthcare: $20 million
- David Cordani, Cigna: $19.9 million
When one looks at the tremendous salaries listed above, the inability to justify this pay seems ludicrous. However, this absurdity appears lost on many companies since there is a large disconnect between what CEOs earn and what their jobs are really worth. In a study of executive compensation, by researchers Cooper, Gulen, and Rau, high-paid CEOs had negative impact on firms:
…Measures of Chief Executive Officer (CEO) excess compensation are negatively related to future firm returns and operating performance.
The reason CEOs negatively impact companies lacks mystery since clearly, CEO pay lacks metrics, due diligence, and compensation planning that results in the hiring of CEOs lacking creativity.
Lack of Metrics & Due Diligence
Executive compensation lacks metrics applied to payrolls and bonuses as well as a lack of creative strategy. One of the major failings for many high paid CEOs was their overconfidence in their ability to make positive changes and this created negative outcomes for the firms, as the research shows,
The effect is stronger for more overconfident CEOs at firms with weaker corporate governance. Overconfident CEOs receiving high excess pay undertake activities such as overinvestment and value-destroying mergers and acquisitions that lead to shareholder wealth losses.
At the core of this problem, seems to be the fact that when it comes to hiring executives and creating compensation packages, the rules governing non-executive positions are largely ignored. When executives are hired, especially CEOs, much of this hiring bases on past performance and reputation leading to unsurprising failures as reported by Harvard Business Review:
...the failure rate of executives coming into new companies at anywhere from 30% to 40% after 18 months. The costs of this failure rate are enormous — wasted and duplicated recruiting fees, missed business objectives, unproductive employees, and distracted colleagues. It’s a significant but mostly invisible drain on corporate productivity.
The number one reason for this poor hiring practice was a lack of due diligence and follow up. Often CEOs were hired with little to no real investigation of their past work or leadership patterns at other companies. When choosing compensation practices, companies were equally ignorant, having studied no prior benefits strategies and determined most executive pay arbitrarily.
Study of public traded companies shows executive compensation had no rationale. Pay was found to be arbitrary with some of the highest paid executives having the worst performing companies, while lower paid executives had better performing companies. Dylan Tweney reported in VentureBeat, “Activision Blizzard CEO Robert Kotick pulled in $64.9 million in 2012, including a whopping $55.9 million stock grant, an increase of 640 percent — while his company’s net income grew just 6 percent and its stock price slid 12 percent.” In contrast to Kotick, Apple CEO Tim Cook took a $378 million stock option in 2011 with the company topping $312 billion in stock value.
The problem with executive pay appears to be that the same rules applied to workers and lower-level managers do not apply to CEOs. This lack of equal application of compensation management and hiring strategies creates a situation in which executives are overpaid in many instances due to the inability to create a positive ROI with regard to their compensation.
Executive compensation lacks motivation for CEOs due to an imbalance in the pay package. The logic behind executive pay dictates an offering of salary combined with stock options to motivate the CEO to increase the company's performance and take advantage of the stock option, which generally pays more than salary. This logic fails frequently since CEOs often make money on the stock of a company even in years when stock loses value due to the way these options are designed. As a result, there is little motivation to improve the company.
While linking performance goals with executive compensation seems like a wise strategy, this wisdom has not proven effective with workers either. Deloitte Insights discusses in "The compensation conundrum" how many business leaders face "uncertainty about how best to approach compensation" in a "rapidly evolving environment."
Standard performance measures to align worker and company objectives through the use of bonuses and other incentives have not had the desired effect so incentivizing executives with more concrete goals like ROI may have a similar failing, especially in light of large bonus compensation packages having the opposite effect.
Delloitt suggests an innovative approach of altering compensation to meet the demands of the changing workplace and workforce, such as more transparency and equitable pay. Despite an ever evolving workplace ushered in by technology and changing views of workplace ethics, most CEOs continue to operate in the same antiquated way. Compensation plans help attract the right kind of executives because they reflect the company’s philosophies, values, and culture, but in a changing workplace and industry compensation needs to align with these changes to attract the right CEOs. For instance, companies that have merit-based compensation systems, such as most sales jobs, are perceived to reflect a more aggressive organizational culture than those that rely on a compensation system that distributes rewards according to seniority. Therefore, the compensation plans that an organization strategically develops helps or repels a certain type of executive and helps an organization create the proper culture for organizational success. It may be that CEO compensation needs to be reinvented to incentives transparency, teamwork, and mentorship.
In many ways, firms open themselves to the danger of the under-performing CEO for having arbitrarily hired, compensated, and applied no metrics to evaluate performance, yet, CEOs carry a large onus of responsibility since their underperformance manifests in unoriginal strategies that endanger the company.
One would assume someone paid millions of dollars would bring to a company unique methods of business building. Yet CEOs consistently rely on acquisitions, take-overs, merging, and even more mundane strategies such as cost-cutting. Cost-cutting is an effective means for achieving sustainable income, which involves identifying areas of high expense using financial statements and drilling down on the data to identify the reason for these high costs. Firms often successfully cut cost by focusing on labor expense because from the accounting side this is typically one of the highest expenses. This form of cost cutting can have the negative impact of reducing quality by combining jobs in an effort to reduce cost.
Company leaders overly focus on areas of expense and other cost cutting tactics such as combining jobs, which saves money but now requires one manager to oversee an even larger number of people and may increase inefficiency. When free trade agreements went into effect in the late 90s notably NAFTA, CEOs readily fired and offshored positions looking for less expensive labor to match new foreign competition. While this strategy may have been necessary, the question also arises as to why CEOs were not seeking better competitive advantage strategies prior to trade agreements, especially since they knew these agreements were coming?
Ultimately, CEOs are hired for their expertise in business and should bring new ideas and insight to the company not more of the same strategies that can be implemented by any manager. The pervasiveness of CEO lack of ingenuity forces an evaluation of their necessity.
The Need for CEOs
Problems surrounding CEOs begs the question of their value and need and studying their pay statistics makes justifying them difficult. Perhaps the issue is less about pay and more about function. What does a CEO do?
Most importantly they represent the face of the company and determine direction through mission and vision. There is nothing in this description which demands only one person do this job for exorbitant pay, and in fact, a committee of qualified managers could perform the job for far less, retaining more control for the company's board. This is especially appealing when considering the fact that the salary of one CEO can support an entire division in many cases. The idea of a company without a CEO might seem radical or foolish but it is not a farfetched notion as companies like Solodev currently operate with a team leadership approach. Perhaps the time has come to take a hard look at different leadership approaches that may provide more effective strategies and less reliance on approaches lacking creativity.