The Fallacy of Corporate Leadership

The other day I had a discussion with a friend about what I perceive as the excessive level of pay and bonuses received by the CEOs of large corporations and financial institutions. I even mentioned the study that showed no relationship whatsoever between the profitability and success of the corporation and the salary levels of the CEO, as well as one of its conclusions that comparatively lower-paid CEOs often headed up better-performing businesses.

He was anything but convinced. His argument was essentially that, if companies were willing to pay that amount, the executives were worth that much, and that there was nothing wrong with the fact that, in some companies, the CEOs made thousands as much as the salary of the average employee. I’m not against CEOs getting much higher pay than everyone else, but it seems to me that what’s overlooked is that large businesses aren’t successful just because of one executive at the top. The fact that they survive and even prosper while turning over CEOs on the average of every five years suggests to me that CEOs are high-level interchangeable parts, and that means that they’re merely more highly skilled workers, meriting great multiples of the average worker’s compensation, but not to the degree of thousands of times the average salary, and in a few cases up to ten thousand times the salary of the average employee. In fact, until about thirty years ago, they were paid only a hundred times or so the salary of the average employee.

Seemingly lost in the current self-reinforcing beliefs of higher executives are some of the old and truthful adages, such as a chain being only as strong as its weakest link, or the fact that no person is indispensable. Instead, the grandees of industry pose and parade, taking full and often sole credit for the work of thousands of individuals, while giving little but lip-service to those below them and while extolling the benefit of cost-cutting and cost-effectiveness. Yet isn’t it strange how there’s no measurable cost-cutting and cost-effectiveness in the executive suites and boardrooms?

Part of that is because, in a multi-billion dollar corporation, wasteful overpayment to a single individual, i.e., a CEO, is almost noise and doesn’t directly affect the bottom line that much. Indirectly, I’d submit, the effect is much greater, particularly among middle and upper management, because those grandiose salaries inspire brutal and often highly unethical internal power struggles in pursuit of what is often literally a golden fleece. Both the power struggles and the outsized upper level compensation also tend to demoralize lower management and create higher stress levels there. Study after study has shown that stress levels actually are lower in upper management and higher in those who work for them and that the highest stress levels are created at lower levels of management when the expectations of upper management conflict with the lack of adequate resources for achieving those expectations and when the compensation differential between those tasked with a job and those supervising them is highest.

These findings also tend to get buried and never find their way to the executive boardrooms, most likely because corporate emperors are as adverse as other emperors to learning that their imperial garments are illusory and their beliefs self-serving. At least as I’ve observed, the great majority of CEOs are in fact at best marginally more talented than their subordinates, yet the great fallacy of corporate leadership remains — the CEO-perpetuated idea that extra-special individuals preside as CEOs, when in fact a great body of evidence, both statistical and anecdotal, strongly suggests otherwise.

7 thoughts on “The Fallacy of Corporate Leadership”

  1. CRM says:

    I wonder if this is related to the way that so many big corporations are more focused on benefiting their stockholders rather than their customers. Decisions that affect stock value are considered more important than producing a good product or service. What the CEO’s do is big, flashy, makes news, and therefore is perceived as important in the strange world of stocks and investment.

    Note: This is a subjective impression, and I have no facts to back it up, but it could be a good working hypothesis pending further research.

  2. darcherd says:

    Another dynamic at work is that corporate boards (one of whose jobs it is to determine senior executive pay)usually come from the same socio-economic class of people as the senior executives and are thus willing to be more generous, visualizing themselves in the same spot someday. A second factor is that many boards are “captured” by the company management, especially when the CEO and Chairman are the same person, and the freedom of outside directors to implement any meaningful reforms is significantly curtailed. Finally, the people who might realistically be expected to not only object to outrageous payments to executives and to do something about it – outside shareholders – are at a marked disadvantage against the power of a sitting corporate board. Outside shareholders cannot directly communicate with other shareholders; only the corporation has the full list of their shareholders, so an activist outsider is reduced to taking out expensive advertisements in the Wall Street Journal if they want to foment a stockholder rebellion. In response to the outrage about executive pay, some corporations have taken to allowing general stockholders to vote on the company’s executive pay package, but in many cases the vote is advisory only and non-binding, and in every case, the vote is only to accept or reject the proposed pay package. They cannot propose an alternative.

    Other factors that lead to executive pay inflation are the widespread use of executive search firms who are often incented to get the best possible pay package for the hired executive because their fee is a percentage of that pay.

    And finally, even when executive salary is relatively modest and the bulk of their compensation is tied to long-term results of the company, very few executives are willing to accept a position in the current climate where the tenure of CEOs is steadily reducing without also having a VERY generous “golden parachute” or severance package.

    Other than giving greater power to outside shareholders to actually effect change in a corporation, I’m not sure what the solution is. But I’m pretty sure the solution is NOT for governments to artificially cap executive salaries. To quote Rocky the Flying Squirrel, “That trick never works!”

  3. alecia flores says:

    I worked for Hewlett Packard during the boom years (1975 – 2000) of tech, and our ‘C’ level officers never made the outrageous amounts that are now standard with so many business (that changed with Ms. Fiorina, BTW). At all levels, the employees were committed to doing their best work because we had a sense that we were all working for the same goal(s). During the downturn in the early 80’s we all went on a 9-day fortnight, thus everyone took a 10% pay cut, even the CEO, and almost all of us worked that 10th day for free, because we believed in the company. The poisonous atmosphere of ’empire building’ and ‘back-stabbing’ was almost non-existent. Mr. Modesitt, I completely agree with your point on this, because I experienced the reverse – what it’s like to work for a company where everyone, from the top down, contributed and was fairly compensated for those contributions. There are a few left who still have a version of “the HP Way” and I have hopes the number may grow, because of the success of these companies.

  4. Tom says:

    I view the CEO in the same light as I do a General in the Army.

    I would say that a CEO such as Patton or Montgomery is overpaid but an Eisenhower is worth the pay.

    The quality I would be paying for is the ability to gather a team together and get them to work successfully so that “the job” gets done. The pay would be tied to the success with the set goal(s); not to the position in the corporate hierarchy(that would be just a base salary).

    Its the “bonuses” for the CEO’s that I find strange because I always associated bonus with success.

  5. Joe says:

    I agree with you. The other side of the glass ceiling is quite different. It’s a club in which people do not suffer any criticism however dumb their ideas, because they are clearly among the “chosen”. They’re not special, but they really do think they are. And they really do look down on everyone not in their club. It’s quite surreal.

  6. invah says:

    >if companies were willing to pay that amount, the executives were worth that much

    This might lead one to the conclusion that executives have no inherent, intrinsic value, only value by fiat.

    There are almost no objective evaluations of executive-ship outside of shareholder value or percentages of growth…which are themselves problematic, and practically subjective for several reasons.

    This leaves executive- and leadership assessed almost as art, whim to charisma and personal power, and reminds me strongly of “The Emperor Has No Clothes”.

    >and that there was nothing wrong with the fact that, in some companies, the CEOs made thousands as much as the salary of the average employee

    My understanding is that whenever there is a great disparity in pay, it is a reflection of RESPONSIBILITY. The person being paid more is paid more because they are responsible when shit hits the fan.

    However, with no practical objective evaluations of corporate leadership, results-proof golden parachutes, and no actual accountability or legal responsibility, I would conclude, as you have, that executive pay is “problematic” at best.

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