Tuesday, March 01, 2011

High Priced CEOs... why?

A rather funny comment got me to thinking about something:

"A unionized public employee, a member of the Tea Party, and a CEO are sitting at a table. In the middle of the table there is a plate with a dozen cookies on it. The CEO reaches across and takes 11 cookies, then looks at the Tea-Bagger and says, "Look out for that union guy, he wants a piece of your cookie.”
There is a funny lesson in this -- be the CEO!

But, there is more to it than that. It raises the question of why CEOs are paid so much more than the ordinary employee. That's a good question to ask, and I haven't yet read an analysis that was much deeper than "because they are" or "because they're crooked."

That isn't to say that such analysis hasn't been done, just that I haven't seen it.

So, here's my take on the compensation gap -- and how it is misunderstood.

Too often the CEOs of very large businesses are mostly caretakers. They are paid lots of money, not because they will result in a rapid increase in the profits for the owners of the business, but because as CEO they could really screw things up royally. That's what the owners of most businesses are trying to buy when they spend "way too much money" on the senior management team. Sure, they'd like to get a CEO in that will cause the company to be worth 10-20% more within a year or two. But, they also recognize that it is much easier for a big business to loose 10-20% of its value by making bad decisions than it is to grow that much. Just maintaining past income and profit levels at most big businesses requires doing the right things and doing them rather well across the board over and over across tens of thousands or millions of transactions.

If we look at the outrageous CEO compensation from that light -- as a form of insurance taken out by the owners of the company -- then it doesn't look quite so insane. It's only when we try to make an apples and oranges comparison between the CEO's compensation and the compensation of an employee who can screw up royally for weeks at a time without tanking the company do things look crazy.

All that said, I don't like big companies. Especially companies big enough that the insurance factor of the CEO or other senior management is a "big deal." I much prefer those businesses where the CEO and other senior management is either doing real work a portion of the time, or has done real work recently enough that they know how to tell the difference between an employee who is getting stuff done and one that is just looking busy.

Further, I think that if we could eliminate corporate welfare, we'd see the small and medium sized enterprises absolutely eat the lunch of most of the big businesses. There aren't all that many enterprises that can only be efficient and effective at massive scales.

No comments: