I have been a CEO of eight companies (I actually had business cards that said CEO) during my career and I have run fourteen distinct businesses for which I was the primary decider of strategy and tactics. The term Chief Executive Officer seems like its a week defined role, but saying you are a CEO can range from being the head of a small start-up company with two people and a dog, to being the person running a subsidiary of a much bigger company, but which must be kept separate and distinct for any number of legal or business reasons, all the way up to being the CEO of a large public company where you have what are known as Sarbanes-Oxley legal obligations to employees, clients, shareholders, regulators and the world at large. Very few positions are omnipotent to the degree that they do not have someone to whom they are accountable. In fact, I consider true leadership to be a role where the number one driving obligation is accountability and the willingness to assume it. Many leaders understand this and are drawn by their alpha instincts to assume accountability and take it quite seriously. Other people see leadership as something that has a benefit, financial, psychic or both and the role is all about taking what you can get until its someone else turn to do the raping and pillaging. What I believe is generally true of most ascending leaders is that they have little or no sense of the huge weight they have taken on and the risks associated therewith.
In the 1960s, CEO’s made about 20X their average employee. That steadily increased during the 70s and 80s to about 60X. it was the 1990’s when CEO compensation skyrocketed, taking that ratio to over 350X. Since then, due to debacles like the Great Recession and other events, the ratio has wobbled, but never gone much below 200X. By 2023 we saw that number climb to 400X. Compensation specialists like to differentiate between granted and realized compensation (probably to shield themselves from some degree of criticism) and note that the 400X is a realization number which was really 240X as granted. What makes the difference, ballooning stock prices and the continuously increasing trend of linking CEO pay to stock performance.
Let me be clear about one thing before I drive home my main points of this story, I have benefited significantly on a financial level by being a CEO. Strangely enough, my biggest windfalls did not come due to the job-specific compensation, but rather by being a partner in a successful enterprise. In the early 90s, as a Partner of Bankers Trust, we received a stock incentive package (different partners got different amounts) that was directly linked to achieving (as in hitting) a very high stock price target that was about double the current price at the time. It was intended to gradually get achieved if we did many things right over about five years. We ended up hitting the target in five months thanks to the rising tide of the stock market. That meant we all got the award on a vested basis. Once you give the meat to the beast, whether he eats it or not, he stands there asking for more. That pretty much describes the partnership stance after that windfall vested. It was a perplexing problem to the institutionalists running the bank, but it was a wonderful feeling for those of us Partners that had this money in our pockets (technically in the firms pocket, but unassailably ours whether we stayed or left). Therein lies the difference between granted and realized.
While most people on the ladder of success looking upward spend lots of time thinking about the riches that lie ahead for them if they attain the vaunted CEO or even C-suite level, they spend a lot less time thinking about the risks. Anyone who has served at the senior-most levels of a highly regulated industry understands that there are perils all around the CEO and that while some of it is there intentionally to keep these all-powerful sorts on as much a path of righteousness as they can. In other words, many of the perils are specifically designed to keep the CEO from putting his/her own interests ahead of those of his/her constituents, however they are defined. They also are there to reign in the power component of the position so that it does not run amok just because it can. Those are all easy to see and generally to agree with, but what also happens is that the changing regulatory or business landscape also causes the lines that are not to be crossed to move, often without warning and without any grandfathering of actions already taken. Most CEO’s understand that managing in ambiguity is simply a part of the job, but there is a difference between normal ambiguity and a changing landscape or playing field. I have often said that if some people knew what personal risks they were taking, they might prefer not to be the CEO. I have actually known several professionals who always defer to the #2 spot because they feel the risk/reward coefficient is better suited to their risk tolerance.
We have now had an incident with the assassination on the streets of midtown Manhattan of Brian Thompson, CEO of United Healthcare, that adds to this risk/reward equation. To begin with, he was, as I implied above, not the CEO of the public company parent, United Healthcare Group, but rather, the CEO of the health insurance subsidiary of the Group. His job was to grow the business as much as possible. Sometimes companies emphasize top line (revenue) growth and sometimes, as is the case with more mature companies like United Healthcare, the emphasis is on bottom line (profit or net income) growth. In the insurance business, that means selling more policies AND paying out less for claims or the management thereof. As you can imagine, generating new revenues is often much harder than slicing out costs or figuring out how to simply pay out less on the policies. Therein is the suspicion of what might have motivated the assassin (still not indicted though a Pennsylvania man of interest has been apprehended while the investigation continues). It doesn’t take too much imagination to think that the life-impacting nature of claim denials could cause some people to go over the edge and seek retribution. Whether that happened or not is hard yet to say, but social media is abuzz with the denouncement of healthcare professionals like Thompson for zealously doing their jobs to the detriment of some claimants.
Lately, the issue of character has taken a backseat to transactional capability. While no one is advocating bad or ethically questionable behavior, putting the characteristics of character further back in the list of desirable traits of a CEO or leader and emphasizing achievement and production first and foremost is always tempting, but often leads to long term problems that impact the sustainability of businesses and sometimes spectacular setbacks. I have seen many in my day and feel there is never a justifiable reason for taking shortcuts to success. They most often backfire in one way or another. In Brian Thompson’s case, he may just be collateral damage for an industry that has flown too far from its ethical moorings or he may have directly contributed to those problems and gotten tagged by someone for a specific action deemed offensive. We may or may not ever know.
But regardless of this case, it is safe to say that CEO’s and leaders of all type probably need regular reminding that the burden of command brings with it many, many personal risks that can range from unpleasant to deadly. Think about that the next time you squabble about how much we pay our CEOs.
Rich,
I read your recent article with much interest. I understand (I think) what you are saying, but I think you missed the mark, or at least part of it, in evaluating what is most important for a CEO or leader, to keep in mind when managing a business or a large group of people. I am referring to the fact that a leader or CEO owes allegiance to his/her shareholders, but he/she also owes something (let’s call it allegiance) to those lower level workers who spend their days working ten, twelve, fourteen hours trying to help build the company for a fraction of the pay of their CEO or leader. I know CEOs work hard too, but at what point does the disparity between CEO pay and “worker” pay get too large? When does the difference become “obscene?” I think many of our U.S. companies and corporations have reached that point years ago, but nothing has significantly changed. When you (not you specifically) are the one making millions or even billions a year, it is easy to justify your pay by rationalizing that you work hard for that money! The same could be said about the plant worker, or shop foreman, or cotton picker, or whatever.
Matt, I totally agree with you and thought about that while writing. I believe a CEO owes allegiance to shareholders, creditors, customers and employees. I agree the company levels are obscene, but I also know from doing it that many who take on the job don’t understand the full breadth of the risks that come with it
Another thought, Matt, the high-water multiple for European CEOs seems to be at about 50X the average employee compensation. Do you find that level fair?
Also, how do any of us make sense of Elon Musk getting a 70% referendum approval from shareholders for his $56B pay package while the courts in Delaware are still saying No. I tend to side with Delaware, but that referendum is troubling nonetheless.
As I see it, the key to your question about Elon Musk (for whom I have little to zero respect) is “shareholders.” He has done well for his shareholders as have multiple U.S. corporations over the past 30-40 years. The “worker bees” of his companies—not so much. I’m reminded of Boeing, who is in a world of hurt right now. Second, what % do I think fair? Difficult to answer definitively, but certainly not CEOs getting paid 300-400% more than the common laborers who do most of the grunt work. BTW, I’m enjoying talking to you. I find your daily articles very interesting for the most part. Cheers.
I share your opinion of Musk. And yet, I owned a Tesla X for 7 years and found it the best car I ever had. I now am happier with my Ford F-150 Lightning at half the cost of an ugly cybertruck. Shareholders may only be one constituent, but private ownership (ie. capitalism) gives them ultimate say on remuneration I suspect. Regulating or adjudicating ethical actions with regard to exec comp on private companies is tricky. The narrow path might be to say “Too big to fail” support gives government that right, as does stuff like EV tax credits. I think the answer is like Congressional super-majority rules….give employees a 20% vote and regulators a 20% vote and then if anything can past a 60% vote hurdle (say to raise CEO comp above 100x) then accept it.