As they downsize firms, export jobs, pay less taxes, and contribute to the balance of trade deficit, our corporate executives have been giving themselves big raises. As is widely noted, the average CEO now gets more than two hundred times the pay of an average employee. This ratio of American CEO compensation to workers' pay is by far the highest in history and the highest in the world. The alleged justification is that while they may be screwing employees, despoiling the environment, and neglecting their communities, they serve the interests of their shareholders. Moreover, following good market principles, a $5 million dollar man is worth far more than a $1 million dollar man. The evidence for this claim is roughly zero. The power and perks of the CEO of a large firm are such that most executives would take the job even if it came with a pay cut. And there is reason to believe that the current crop of CEOs are at least as likely to hurt the shareholders as they are to benefit them.
Large companies tend to be the products of cultural evolution rather than conscious leadership-- effective techniques are copied and become entrenched, while useless diversions tend to wither. They are the products of thousands of decisions over time, and probably no one understands the totality of any of these largely self-regulating entities. Sustained growth and earnings depend fundamentally on having a large share of a permanent market. The share is maintained because such positions allow a firm to outspend its rivals on new product research, marketing, and manufacturing technology. The CEOs of such firms essentially preside over self-functioning organizations in which experienced employees know how to do the work and interact with one another. This works for the benefit of employees, suppliers, customers, and communities, and satisfies the CEO if he is the founder or a long-term employee who inherited the job from the founder.
Since a new CEO hired from outside knows little about the firm or its industry, he often hires a management consultant or investment banker to advise him. They know no more about the business, but they do know how to flatter CEOs. Like Newt Gingrich, they peddle their megafads-- paradigm shift, right-sizing, globaloney-- or tempt the megalomania of their victims with grandiose acquisition schemes, which earn the biggest fees. Does anyone really believe there is some economic benefit in Time-Life-Warner-HBO-Cinemax-Atlantic-Elektra-Nonesuch-Reprise-CNN-TNT-TCN-Martha Stewart-Atlanta Braves?
Hired CEOs can do nothing quickly to build a successful firm-- as serious scholars have observed, success depends on a high market share, which takes time to achieve, and on experienced employees who know what they are doing, which also is a function of time. What hired CEOs can do quickly is ruin a company. The hired CEO feels obliged to do something big and fast to impress the rest of mankind. He can reorganize, which means that employees no longer know what they are supposed to be doing or how to interact with other employees. He can downsize, which means he will lose the competence of experienced employees, terrify the survivors, and substitute self-serving back-stabbing for cooperation. He can throw resources into new markets (or "globalization") where the established competitors have the invincibility of strong market shares and will continue to get all of the profits. He can make acquisitions, which for arithmetic reasons are always bought for more than their worth. (Academic studies have confirmed that takeovers are good for sellers, not buyers.) Since his own managers are less experienced in the acquired business than the former owners, the acquisition typically becomes worth even less, not more, and the interest costs on the purchase price reduce the total earnings of the new parent and induce damaging expense reductions in the original profitable business.
Examples of such destruction can be found every week in the business press. RCA was a power in broadcasting and consumer electronics until it entered the computer field and yielded consumer electronics to the Japanese. AT&T gave up its research based communications monopoly to get permission to go into the computer business-- and lost both. In a fit of absence, GM bought Ross Perot's data processing company and lost its dominant share of the car business, much of it to the Japanese. Kodak was the standard for film and cameras, so they gave that business to the Japanese while pursuing will-o-the-wisps in clinical laboratory supplies and pharmaceuticals. The Japanese are not immune to the disease-- Matsushita and Sony lost billions buying Hollywood film studios. These were not the only reasons for these companies' problems, only the most overt examples of destructive meddling by CEOs.
Of late a new phenomenon has been added to the mix. Companies like Disney, Apple, GM, and AT&T hire senior executives with no relevant experience, keep them a few months, then pay them tens of millions to go away.
Shareholders, it seems, would be better off without CEOs. Perhaps they should be treated like the Queen of England-- powerless but well-dressed figures to be trotted out for public ceremonies. You could probably find plenty of people who would take the job for $20K a year.
-- Art Hilgart
Art Hilgart thinks vision is the Virgin Mary appearing in a tree and that a mission is where drunks go for soup.