Why do CEO's of big corporations get paid so much?
The simple answer I favor is: supply and demand. The boards and investors of big corporations are willing to pay top dollar because it's hard to find someone who can do the job. With so many big corporations looking for CEO’s and few people who actually meet the arduous qualifications, the bidding goes into the stratosphere.
This answer, however, is far from consensus in the blogosphere where many see the simple answer as uncontrolled greed that is an inherent part of the big corporation culture - “The bosses can get away with this, so they do it. The boards, investors, and workers are whoosies compared to the CEO's.”
This disagreement on something as basic as a root explanation is part of the complexity of the question. Indeed, the disagreement smacks of blind-spot-thinking. Figuring out why this difference of opinion exists lead to my next research question: “Why is this a job so few people are qualified for?”
Running a business is inherently complicated and dynamic. From day-to-day things change in surprising ways and solutions must be found quickly. In addition to daily operations, many businesses suffer a healthy dose of The Curse of Being Important: Along with customers, workers and management, a lot of other people take a serious interest in how any given business is run, and these other people make a difference - I will be describing how in this section. Some businesses get a double dose of the curse by becoming icons for a cause. Monsanto, for instance, is an iconic evil company for those who oppose genetically modified (GM) foods, and Apple under Steve Jobs was an iconic good company for those who love new personal technology gadgets.
One such group of people who have the ability to initiate public attention and create change in the business playing field are those who demand social justice. These are people who believe that bosses inherently wield too much power. Consequently, they also believe there will always be abuses of the boss-worker relationship, and the boss-customer relationship, and that these abuses can only be stopped by concerned outsiders. Social justice advocates support external rules and regulators whose jobs are to inspect and hold boss abuses in check. They are in favor of regulators and unions being involved in deciding how a work place should be run. The bright side of this is getting a third opinion on things such as safety issues.
One of the common characteristics of those who love social justice is that they also love prescription: the one right way to do things. Example: people who feel greater income-equality is a good thing, often feel job status quo is also a good thing - both are “the right way” to do things. This leads to supporting the tactic, “Keep the jobs the same, just spread the CEO salary among the workers.” as the way to solve this issue. This heart-thinking is something American unions of the 2010's have adapted to and protected. It is not difficult to detect the love of and adherence to prescription as one of the great attractions of a union environment. The longstanding dislike teachers’ unions have for charter schools is one example. The charter schools are a way of experimenting to improve education techniques, but the teachers’ unions see them as a threat to the status quo of teachers in the public school system.
The teachers’ unions are also an example of the good intentions of regulators and unions becoming twisted into supporting curious rituals, goat sacrificing, and waste. A 2010 Davis Guggenheim documentary film, Waiting for Superman, shows some of those strange rituals as it follows a group of students trying to get into charter schools. The example from the movie that became notorious was the “Rubber Room” where seriously loser NYC teachers reported to work, day-after-day, so they could get paid even though they couldn’t teach.
Unlike social justice advocates and unions, there are groups that care more about business effectiveness. These are groups that like to see things accomplished in the most effective and efficient ways possible. Not surprisingly, one of these groups is customers who like products well-suited to their wants and needs. Another non-surprise is the business workers and managers who want to see the business thrive. These are the people who are “heads up” when it comes to the best methods for getting things done and monitoring how effective the organization as a whole is run. They ask questions like, “Are we still relevant?” and “Are we using our resources as efficiently as we can to produce customer-satisfying products and services?” These people are not focused on fairness, nor are they likely to be prescriptive. They are constantly looking for new and better ways to do things, with “better” defined as most cost-effective.
The Curse of Being Important, however, means the tent is big, all these groups influence the company’s destiny.
Being a CEO of a large, high-profile business organization is a different job from that of running a small or medium-sized business. One of the big differences is the size of The Curse - it is orders of magnitude larger in a large, high-profile company. The outside groups that surround big companies are both vocal and influential when it comes to the CEO’s management style and the corporation’s destiny. To make matters worse, these groups do not agree with each other. This means the CEO’s job is filled with a whole lot of people-grief, which is what makes it difficult and what narrows the qualified candidate field.
One of the major contributors to people-grief is the groups that demand social justice - fairness - in how the corporation is run. However, social justice and business operations are not measured by the same standards. Social justice demands are different from business operation demands because there is no equivalent to the “bottom line” that measures relative success or failure of operations. Instead of a bottom line business approach, social justice success has traditionally been measured by the emotional response in the eye of the beholder. In recent years, social justice success has been measured by tangible change – [X] number of workers have gotten a pay raise of [Y] percent, but this kind of measuring is not the same as bottom line change.
Demand for CEO’s who can deal with both bottom line and social justice has skewed the qualification requirements. Being a “people person”, an effective persuader, frequently moves to top importance and displaces technical expertise in a company's operations. The “engineer” comes in second to the “politician”, and yet the CEO must possess capabilities for both.
The surprising result is that these grief-tolerant, people-oriented, persuasive CEO's are also very good at persuading industry regulators and politicians. In the end, this talent pays off handsomely for the 21st century CEO.
One such example of a CEO’s need to possess multiple skills is taken from this 25 Jan 13 WSJ Weekend Interview article, “Travis Kalanick: The Transportation Trustbuster: Travis Kalanick, co-founder of Uber, talks about how he's bringing limo service to the urban masses - and how he learned to beat the taxi cartel and city hall,” by Andy Kessler. The interview describes how much of a people-person Uber founder, Travis Kalanick, has to be to implement his disruptive technology ideas in a social environment heavily encrusted with “fairness” status quo regulations: those that sustain the taxi and limo services in many cities.
The effective CEO has to find a way to balance the business and social justice needs within the organization - fairness and bottom line. This balancing means taking focus away from the bottom line point of view in order to support unions, provide health care, fund charities, sponsor green movement… whatever. This is expensive for a company in a highly competitive environment, so to support the balance the CEO also works on fixing the competition side. For this purpose, the CEO persuades regulators and politicians to construct barriers to entry into the business’ operational areas. In other words, the effective CEO works on making it harder for other companies and individuals to compete on its turf. The CEO justifies this by arguing that high barriers keep incompetents out, and it gives the corporation far more freedom to help the community with the many social justice and fairness issues that demand attention.
Sounds nice, strokes emotions well, but a visible flaw is it takes a superstar CEO to keep this kind of parade moving forward smoothly. Ultimately, the CEO who can manage this kind of success gets paid like a rock star.
The price tag, however, runs far beyond rock star wages. One of the greatest costs is that these big corporations become prescriptive. They pick up a “right way” to do things and stick with it in order to accommodate regulators and union members who also like sticking to the right way. This becomes a cozy arrangement, and it can thrive for decades. It thrives until new technology advances or the market place create changes to the playing field. When that happens, competitors thriving outside the barriers to entry start pleasing customers more than the protected companies, and a “Golden Age” ends. At the onset of the television revolution in America in the 1950’s, producing TV shows and broadcasting them were both expensive propositions. The result was only three broadcast networks thrived, and their CEO’s were national VIPs. These networks supported reporters, like Walter Cronkite, who were concerned about social justice and took balanced reporting as a serious responsibility. Thirty years later production costs had come down a lot and a new distribution technology had become popular - cable networks serving urban areas. The Golden Era for the three networks ended; broadcast networks stopped supporting rock star CEO’s, and news reporters evolved from balanced to deeply opinionated. Ever cheaper digital camera technology and video streaming on the Internet is continuing this revolution.
An alterative to rock star wages and prescriptive corporations is for those concerned with social justice to be less concerned with the specific fairness of income distribution and rights, and more concerned with the general fairness of having businesses and workers operate in a level playing field with low barriers to entry and exit. Social justice heart-thinking must be concerned less with rights and more with lowering barriers to entry. It must advocate for barriers to be low and remain low, as well as for a playing field that is simple, level, and transparent. This is done in part by asking the government for laws that create a level playing field for businesses. These level playing field laws should replace micromanaging laws and regulations that raise barriers to entry into a particular kind of business.
When the barriers to entry are low, running a business becomes more about spending time and attention on understanding customers and business operations and less about spending time and attention on understanding patronizing rules, regulators and politicians. This change happens because the whole business process gets simpler and more to the point. A big business example is the 1984 breakup of AT&T/Bell phone system into seven regional phone companies, a decision made to get the company out from under a lot of government regulations. The flowering of the regional Bell companies since then has proved the wisdom of this choice.
A critical thinker will quite naturally ask at this point, how does more and better competition solve the social justice problems? How does this improve wealth distribution?
The first good consequence to lowering barriers will be more businesses, as in more business entities. It makes sense that when it is easier to get into a particular kind of business, there will be more businesses pursuing that trade or service. When this happens the CEO’s role changes. Instead of the job being mostly about navigating rules and regulators, it becomes about business operations - how to run the business more efficiently and how to effectively increase customer satisfaction. This change of focus will change who is qualified to be a CEO and will broaden the applicant field tremendously. The “engineer” goes up in value and the “politician” goes down. This will effectively break the demand for superstar CEO's and will break the super high-end salaries.
A second consequence to lowering barriers is that workers will have more choices. Ironically, the current intricate waltzes to getting in and out of a job favor boss control. The classic worker fear, “The boss will replace me if I object to his orders,” can be ameliorated by the comfort that “There are many fish in the sea. I won't have a hard time finding a different company to work for.” The boss's strangle-hold is broken because there are a lot of bosses to choose from. Keep in mind, for this kind of security-in-choice to happen, both moving in and out of a job has to be a low barrier process. In addition to lightening government and social justice involvement in how workers are chosen, this means cutting down on things such as perks that come only with many years of employment and non-compete clauses in employment contracts.
The social justice downside of these changes - the scary part - is that business becomes even more dynamic. Because there will be more competition, and innovation can spread quickly, businesses will rise and thrive and fall by the wayside even faster than they do now. Having a job will be even less of a lifetime affair than it is now. Understandably, this will be a very scary feeling for prescriptionists - those who love things nice and settled.
The social justice upside is that businesses which fall by the wayside will be replaced by successful businesses. Growth will be big in the boom times, and searching for the next big thing will be a scary time when the boom for a particular company or industry runs out. A current example of this is the fast churning in high technology companies. If you regularly go to a high technology trade show, such as CES (Consumer Electronics Show), you meet the same people in the industry year after year, but the companies they are working for and their positions at these companies will change constantly. The industry is good to these people, but it's a roller coaster ride - a boom and bust environment.
I am recommending this kind of dynamic environment spread to many more kinds of American businesses and employment. If this kind of churning spreads to education and health care, the result would be faster productivity gains and more interesting jobs for workers to take on. Not only would job growth and employment opportunities expand more quickly, but the income inequality would be reduced because the barriers to entry for all kinds of jobs would be reduced - both worker and management. There would be more income equality because the new business environment would be a more equal place. It would break the unholy alliance between good intentioned social justice seekers, prescriptive union bosses, government regulators, and grief-tolerant/people-skilled, rock star CEO's.
At the heart of this change for the better is for social justice seekers to pay close attention to what their intentions are actually creating. They need to be aware that when they directly seek income equality and workers rights, they are supporting rock star CEO's, monopolistic business practices, and status quo. What social justice seekers should be striving for is an environment where rock star CEO's are not in high demand. That environment happens when the playing field is simple and barriers to entry are low. In that environment there can be lots of businesses, and those businesses will thrive when their CEO’s concentrate on business operations.
This 8 Sep 12 Economist article, “Bargain Bosses,” discusses the topic of whether or not bosses are over paid, and concludes they usually aren't. And this 15 Sep 12 article, “Pity the Investment Bankers,” talks about the emotional gulf people feel between banker jobs and other kinds of jobs. “People thirst for vengeance. But the industry is already in retreat.”