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Are CEOs Worth It?

Some time ago I received an email from a reader entitled "Are CEOs Worth It?" Here's what it said:

I just read your column on the three things a CEO should do to be successful (What a Good CEO Does: Three Things). Would you agree that, in most cases, the company could fire the CEO and hire someone young, smart, and hungry at 1/10 the salary/perks/bonuses who would achieve the same performance?
Now, I do try to respond to reader emails - even the really disturbing ones - so I gave it some thought and replied, "No." I mean, he didn't ask what I thought, just if I agreed with him. And, well, I didn't.

In case you're wondering what led to that answer, it was a simple calculation. Using my salary and bonus as CEO of a venture-backed company some years back, the reader was asking if I thought the board could have hired someone of my caliber for around $30K a year. Sort of a no-brainer.

That said, I think "Are CEOs Worth It?" is a very intriguing question. And since most people don't have a clue what a CEO actually does or how much the average CEO actually makes, it certainly deserves and answer.

Are CEOs Worth It?

  • Is Steve Jobs "worth it" to Apple's shareholders, customers, and employees? I think you'd be hard-pressed to find anyone who would say "no." Likewise, was Bill Gates worth it to Microsoft's stakeholders? How about Richard Branson and the Virgin Group? Sure, they're founders / entrepreneurs. So how about John Chambers at Cisco, Eric Schmidt at Google, Meg Whitman at eBay, or Andy Grove at Intel. Are they worth it? Of course they are.
  • Was Lou Gerstner worth it to IBM? When everyone else thought the only way to save the company was to break it apart, Gerstner alone realized that "IBM had a unique and unequaled capability to apply complex technologies to solve business challenges." By restructuring IBM around that new value proposition, Gerstner brought "IBM back from near extinction." He was worth it.
  • How about Howard Schultz? Without him, there would be no Starbucks. Is he worth it? How about Fred Smith of FedEx, Herb Kelleher of Southwest Airlines, or John Mackey of Whole Foods? Do I need to tell you what kind of return on investment all these CEOs I've named so far made for their stakeholders? How many jobs they created? They were all worth it.
  • Folks love to throw around big numbers from CEOs of the S&P 500, but there are about 9,000 public companies in the U.S. and at least an order of magnitude more private companies. The vast majority of CEOs don't make anywhere near the kind of dough you read about all the time in the media. Typical small business and startup CEOs probably don't make a whole lot more than their highest paid employees.
  • CEO pay example: Harold Hughes, CEO of Rambus - a $300 million company valued at $2 billion - last year total comp, not including stock, was $633,000. Sure, his stock and option grants were valued at $1.1M, but only because the stock went up. CEOs of most private companies, which are much smaller, probably make about half that.
  • Just so you know, I certainly don't think every CEO is worth it. Just look at a few recent failed or failing turnaround attempts: Jonathan Schwartz at Sun, Dan Hesse at Sprint, Michael Dell at Dell, Jerry Yang at Yahoo, Mike Zafirovski at Nortel. Are they worth it? Probably not.
  • These days everybody's talking about Wall Street versus Main Street, whatever that means. The truth is that Wall Street is a narrow sliver of corporate America. It's also part of a dysfunctional system that includes the Treasury, the Fed, Congress, and federal regulators, i.e. the foxes are guarding the hen house. So no, I'm not going to sit here and defend what top executives on Wall Street make. It's obscene, it's corrupt, and it stinks to high heaven.
As the pinnacle of the business world, people tend to either glamorize or trash CEOs. While that's understandable, it's not logical. After all, it's just a job. And like any job we've never had, most of us know very little about what it entails. We only know what we read, and that's pretty hyperbolic, if you ask me.

Bottom line. Some CEOs are worth it and some aren't. Indeed, in some cases, CEO pay is out of control and corporate governance is dysfunctional at best. Moreover, I generally think that companies get what they pay for. And, if you did a quantitative analysis of CEO compensation versus stakeholder satisfaction, I suspect you'd find a bell curve similar to that of any other job or profession.

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