Friday, May 26, 2006

Something I Know Nothing About

What follows is one of those subjects that I know just enough about to get myself in trouble. The subject is the compensation of CEO's of large companies.

I am a business owner - and my pay is directly influenced by decisions I make every single day of my life, over and over and over. I set the margins, decide which customers are worth chasing or cutting, fix the level of employee wages, decide which vendors to do business with (or not), purchase goods and capital, and, at times, do collections. Oh, yes, I take turns with the other employees cleaning the johns too. I am not too proud. Pride is one of the most dangerous things I think you can have too much of, but that is grist for another post, on another day.

We see fairly often articles bemoaning how much corporate CEO's make. Usually they are Fortune 500 companies and the compensation packages that include all sorts of stuff like stock options and other things amount to tens (or hundreds) of millions of dollars a year. The Becker-Posner blog had a very interesting post and comment section today that discusses this.

I have always wondered how much worse I could do than a person like Carly Fiorina or, better yet, Michael Eisner. These are two people that pop into my head instantly as being overpaid in the most obnoxious sense as relates to the value of the company, or, more importantly, the shareholders. I used to have HP shares until Fiorina worked her magic, then I dumped it. I picked up Disney soon after they tanked a few years ago and still hold those shares today.

The point I am trying to make is that I could sit in an office somewhere for days on end and make stupid decisions and collect the money just as good as Eisner or Fiorina. On the other hand, I am talking about something I really know nothing about. I don't know how much pressure they were under by the board of directors of these corporations to make certain decisions or if they actually researched things before doing them. It is hard to believe that before buying Compaq that Fiorina actually talked to industry people beforehand. Then again, I just don't know.

I simply cannot grasp how Eisner brought over a quarter of a billion dollars a year worth of value to the company when he was at Disney. I mean, how much work can one man do?

Being the owner of shares of many of the Russell 5000 and Fortune 500 it has become more and more important to me to research the CEO's of these companies and find out just how many stock options they are receiving. Each option they receive dilutes my value. Especially on the day they decide to sell. So my question remains, how to quantify what CEO's are good and which are bad? And how much are they really worth?

I would submit that the level of management BELOW the board of directors is where the real value of a publicly held corporation comes in. I would imagine that the board is comprised of CEO's of OTHER CORPORATIONS and it would not be in their best interests to start pushing other CEO's to perform better or take fewer options.

Another good point was made in the original post over on Becker-Posner. It isn't like the head of a giant corporation can make spot decisions like I can do at my very small company. And it isn't like the CEO can control world events either. Then again, if the CEO at Exxon decides to take a gamble and explore for oil in a place that was possibly very risky and it turns out to be a big money maker for the company, dosn't that make the CEO's talents much more profitable than possibly $250 million per year? If the gamble pays off and Exxon's stock soars $10 per share per year, does it matter to the average Joe shareholder, like myself, if the CEO is getting a boatload of options? I suppose it really doesn't, but to larger brokerages that make very large investments in these companies it would make a very big difference. All very interesting to me.

Of course, I don't live in that world. I live in a world that rewards me or punishes me for each and every single thing that I do, for better or worse. I would be interested in any comments readers may have on the value of CEO's if they have seen them in action at some large companies.

2 comments:

PS Indy From Hobart said...

Dan:

Good post. A couple points.

As with the CEO, the decisions that you make affect the lives of the employees who work for you. I think its a huge responsibility and a stressful one. People's livlihoods depend on your ability to make good business decisions.

That said, who ever said that a CEO was an "Ideas Man?" I would even go one step further, its not the CEO or the first level of management who make the company, its the second level of managers and the grunts who work them.

My problem isn't with a CEO making 35 millions dollars. My problem is that the same CEO doesn't want to share the wealth with his employees when the going is good. My problem is when the going is bad, he's still making his money while I have to wonder if I'm going to be let go.

Big Hal said...

I worked for Global Crossing at the time they declared bankruptcy and I joked at the time that they should just institute a CEO for a day program. Each day a random employee would be selected to be CEO, that employee would earn one full days pay as the CEO and perform all duties. I figured that the results couldn't be any worse than they had been under the current and previous CEOs.