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.)
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.)
Personal FinanceMany employees blame office politics when they fail to get promoted, but they may be sabotaging their own careers with these behaviors.
ProfessionalsRead an in-depth review and comparison of a career in investment banking and a career in corporate finance, with advice about which one to choose.
EntrepreneurshipSTART-UP NY is an initiative designed to attract companies to New York State by giving them 10 years of tax breaks. Sounds good, but is it a success?
EconomicsA silo mentality occurs when certain departments in an organization do not share information or knowledge with other departments.
InvestingGeneration Y embodies the trend towards meshing office life with play, and is creating a new and unique work/life balance.
Investing NewsCan business leaders effectively lead the country's highest office? Next year may mark the first time that we'll find out.
Fundamental AnalysisPart of fantasy sports’ success lies in one-day and week-long contests serving as an alternative to season-long games. FanDuel, a leader in this space, has recently surpassed a $1 billion valuation.
ProfessionalsWhy are CEO salaries so astronomically high? There may be more to the story than you think.
Stock AnalysisDrugs mean big profits in America. Here's how the country's oldest pharmaceutical firm keeps its toehold in the market.
Stock AnalysisOther than style, do sneakers from any maker really differ that much? That's debatable. But this is certain: Nike sets the standard for selling an image.
One way to provide employees with effective social responsibility training is to base training sessions on resources offered ... Read Full Answer >>
Social responsibility is important to a business because it demonstrates to both consumers and the media that the company ... Read Full Answer >>
A number of factors play a part in making a business profitable, including expert management teams, dedicated and productive ... Read Full Answer >>
Starbucks CEO, billionaire and former sports tycoon Howard Schultz has several pieces of advice for would-be moguls and, ... Read Full Answer >>
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 >>
Tim Cook's managerial style could be broadly defined as democratic. Rather than standing in complete contrast to former Apple ... Read Full Answer >>