Best-paid CEOs perform the worst

I think it follows logically all CEO’s should be paid minimum wage, made to punch a time clock, and subjected to humiliating workplace regulations. Maximizing shareholder value, don’t’cha know?


I believe this is formally known as Worthington’s Law.

I think this study shows that they do perform worse, and even explains the mechanism that makes them perform worse. I don’t find your alternative explanation very plausible - do companies pay their CEOs more the worse they are doing? If that’s the case then the relationship between high pay and low performance would be even more obviously causal.

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I think seeking profitability through mergers and acquisitions is an act of desperation for companies who can no longer grow by providing value to consumers. I think highly paid CEOs do this because they’re hired by companies that realize they’re fresh out of natural opportunities for growth.

Buying market power isn’t desperate, it’s profitable. It produces more security for the power of the players running the company, it defends the company against the possibility of being churned under by more able competition. The purchase of market power sucks for everyone else, but it secures a decisive advantage for companies that should find no advantage from their crappy products and poor service.

It isn’t desperation, it’s winning. Yes, it’s cheating, but buying power gets the job done in a fundamentally less risky way than the “competition” used by the plebes.

Yeah, sometimes. The two major mergers leading up to the New HP, Digital and Compaq, and then Compaq and HP, weren’t really about that kind of preemption: both DEC and Compaq were a bit desperate at the time of the mergers, and looking to be acquired. In both cases, the target still had very profitable aspects that would have been prohibitively expensive to develop in-house: service and logistics (Nijmegen) at DEC; ProLiant and domination of the ISS market at Compaq. In both cases, the integration of the target company went… somewhat less than swimmingly. For all the integration woes, Compaq did make good use of Niemegen; I don’t think the same could be said of HP’s use of Compaq ISS (nor, for that matter, Nijmegen - that got outsourced, much to the detriment of our SLAs). Be that as it may, the reason for acquisitions of the parts of Pfeiffer and Fiorina respectively seemed to be pure hubris - “Bigger than Dell”; “Bigger than IBM.” This was the start of real industry consolidation, but the nominal reasons weren’t to lock out competition, rather to take on the largest players.

A quotation regarding Pfeiffer’s takeover of DEC:

The kind of goals he had sounded good to shareholders – like being a $50 billion company by the year 2000, or to beat I.B.M. – but they didn’t have anything to do with customers.

That about sums up the whole executive compensation issue. When I was a young man working for a Fortune 500 company long ago in a place far away (well, almost 45 years ago, and two hours down the 417), stock options were not a major part of an executive’s compensation, and that compensation tended to be about one order of magnitude greater than the salary of the lowest-paid worker in the company, say 6 figures vs 5. Stock options are now a major part of executive compensation, top executive salaries have risen to about 3 orders of magnitude greater than the lowest paid worker’s.

Corporate “strategies” tend to reflect that. The company I was with 40+ years ago was once the most profitable player in the boilermaking industry. With the fall of the Old Guard in management, and the rise of the quarterly bonus and stock options, quarterly profits started driving decision-making, and profits that were once deferred to see the company through the lean years (in a highly cyclical industry) were instead declared to boost the share prices. The end didn’t take too long to arrive after that: what’s left of the company is now a minor division in the French conglomerate Alstom after passing through ABB’s hands.

No, for reasons stated above - the nature of the compensation drives the decision-making (at the executive level). The Boards reward the CEOs that way because they are compensated the same way by their respective companies - it’s a case of “Scratch my back” because the newly-minted CEO may well appear on a Board of Directors that affects the Board member directly. There are a lot of interlocking Boards out there. The game is rigged, and it’s only nominally in the shareholders’ favour: shareholder value is an excuse for decisions that really only benefit top management (and perhaps those insiders able to cash out before the crunch comes). “Cheating” through acquisitions (as per Andy) is a response to this - shareholder value is always good in a monopoly. The mentality at play is “Big Kill”, in an environment that really requires a cultivator’s mentality to thrive.


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