Executive compensation is a big deal. CEO compensation has not only recovered to pre-recession levels - it has surpassed it. That stings more than normal, though, given that average worker wages have been stagnant.

TUTORIAL: Employee Stock Options: Introduction

Looking at the apparent lack of economic sensitivity and actual performance to CEO pay, as well as the seemingly unbreakable upward trend, it seems as though CEOs are increasingly paid like star athletes. Leaving aside the question of whether star athletes deserve the money they get, it is well worth exploring whether CEOs should really be in the same group as these star athletes. (For related reading, see A Guide To CEO Compensation.)

Are CEOs Like Athletes?
Star athletes generally have exceptionally rare skills that are honed over a lifetime of practice. Ultimately it is the rarity of that skill that drives the demand and value of their services. People grousing over the incredible salaries paid to athletes often comment that "anybody" could get together and play a game of football or baseball. While that's true, what they fail to realize is that nobody is going to pay $100 or even $10 to watch "anybody" play a game.

What is often lost in analyzing athlete compensation is the value creation that is tied to those rare skills. People are happy to pay up to experience the best; and this is true in sports, music, literature and most other fields. Athletes command high wages because they are the centerpiece of both production and demand in multi-billion-dollar businesses. (For related reading, see The Benefits And Value Of Stock Options.)

Comparing CEOs to Coaches
Coaches are charged with the responsibility to manage and motivate talent, and to create plans to best use that talent. That sounds a lot like a CEO's job description. In sports, the athletes effectively are the product, but that is not the case in business. True, maybe a handful of companies have such incredible visionaries in charge that investors are effectively paying for that vision, but they are few and far between.

The interesting thing about this comparison is that coaches are not paid on anything close to the same scale as athletes. Bill Belichick, the very successful coach of the NFL's New England Patriots, reportedly makes about $7.5 million, while Doc Rivers (coach of the NBA's Boston Celtics) makes a similar $7 million, and the top-paid coach in the MLB makes around $5 million a year. While those are all generous premiums to average professional athletes, whose salaries in their respective sports run about $2 million to $3 million, coaches' salaries are far short of top-earning athletes like Kobe Bryant (almost $25 million) or Peyton Manning (nearly $16 million).

In theory, top-flight coaches should be rarer - like a starting quarterback or goalie, there is only one per team - but teams do not pay for that scarcity. The reason may well be the value-creation aspect. Nobody buys a ticket to watch somebody coach; they may appreciate the efforts of that skill (successful teams draw more fans than perennial losers), but more fans will turn up to watch a collection of all-star losers than a team of no-name winners. (For related reading, see The Surprising Salaries Of Fringe Sports Stars.)

Are the skills of a CEO equally rare? In terms of the true visionaries, those skills probably are rare. Likewise, the ability to juggle the multiple demands on a CEO's time, mediate between rivals and ultimately accept responsibility for the direction of a company are not necessarily common.

The ultimate answer may be that CEOs are a synthesis of athlete and coach. Certainly there is a visionary aspect to almost every successful CEO, and not everyone is born with that ability. Likewise, some people are simply unable to cope with conflict or to make a high-stakes decision from multiple options. Those would all seem to be innate traits akin to a star athlete.

Of course, it could well be argued that coaches share much of that as well - coaching is a high-pressure endeavor that demands quick thinking, conflict resolution and decisiveness. The real difference may lie in the fact that the coaches of professional leagues are charged with getting the best out of an already exceptional collection of athletes, while CEOs are charged with building value from the labor of a much wider range of talent. (For more, see Management Strategies From A Top CEO.)

Value Creators
Boards of directors and investors believe that CEOs are value creators, so they get paid like other value creators (like star athletes). What makes CEOs different, and arguably makes their pay more objectionable, is that the core skill of a CEO is talent management, and most people are attuned from everyday experience to admire the raw talent on display and not the management behind it.

Let's face it - no 8-year-old kid has a poster of a coach on his wall, even though it is incredibly rare for a team to win with a great collection of talent and terrible coaching.

The Bottom Line
The key here for investors is to make sure that the "talent" at the top is delivering the goods and being held accountable. Most boards of directors simply don't care about CEO compensation - it is not their money, and they are not really financially liable for their decisions.

Plenty of superstar CEOs out there deserve to share in the rich rewards they generate for shareholders. More than a few also may not deserve to have that many zeros on their paycheck. Just as sports fans can make their displeasure known by staying away from stadiums and refusing to buy memorabilia, investors can avoid those stocks where the CEOs simply don't deliver the goods. (For more, see Pages From The Bad CEO Playbook.)

Related Articles
  1. Economics

    Explaining Quality Control

    Businesses use quality control to ensure their products and services meet a certain standard, as well as any industry regulations.
  2. Professionals

    Consider A Career As A Financial Communications Professional

    Regulators, sales people and clients all look to communications professionals to help them navigate the markets.
  3. Investing Basics

    How Junk Food Earns Mondelēz $35B a Year

    How and why Mondelēz spun off from Kraft. Where the company is going, and how it profits on multiple continents.
  4. Economics

    What Is Servant Leadership?

    Servant leadership emphasizes innovation, employee empowerment, and the development of leaders who serve an organization’s stakeholders first.
  5. Personal Finance

    How Major League Baseball Makes Money

    Major League Baseball is big business. Let's take a look at where the money comes from.
  6. Economics

    Understanding Corporate Culture

    Corporate culture encompasses the beliefs and behaviors that determine how a company and its employees interact and how they work with customers.
  7. Economics

    Time to Worry About a Profit Recession?

    3rd Q earnings season, a weak global economy, a strong dollar and collapsing energy prices suggest that the U.S. may be in the midst of a profit recession.
  8. Investing

    The Top 10 Best TED Talks for Business Leaders

    Influential talks for 21st century managers chosen from TED, a nonprofit dedicated to spreading ideas worth sharing.
  9. Investing Basics

    Do Superstar CEOs Guarantee Better Returns?

    Do great CEOs mean better returns for investors? Here are 14 stocks that show it might just start at the top.
  10. Fundamental Analysis

    The Basics Of Corporate Structure

    CEOs, CFOs, presidents and vice presidents: learn how to tell the difference.
  1. Why is social responsibility important to a business?

    Social responsibility is important to a business because it demonstrates to both consumers and the media that the company ... Read Full Answer >>
  2. How do you conduct effective social responsibility training?

    One way to provide employees with effective social responsibility training is to base training sessions on resources offered ... Read Full Answer >>
  3. How important are business ethics in running a profitable business?

    A number of factors play a part in making a business profitable, including expert management teams, dedicated and productive ... Read Full Answer >>
  4. What advice does Howard Schultz offer would-be business moguls?

    Starbucks CEO, billionaire and former sports tycoon Howard Schultz has several pieces of advice for would-be moguls and, ... Read Full Answer >>
  5. How does brand image and marketing affect market share?

    A company's marketing efforts have a direct impact on sales and market share, but they are not the only factors that influence ... Read Full Answer >>
  6. What is Tim Cook's managerial style?

    Tim Cook's managerial style could be broadly defined as democratic. Rather than standing in complete contrast to former Apple ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center