CEO Selection

It seems to me the best way to pick a CEO would be by soliciting bids from applicants. That way you get the cheapest one that is fully qualified. And you should repeat the process every two years whether the CEO is doing a good job or not.

You might find someone equally good who works cheaper. That's capitalism. I find it hard to believe that a major company can't get a perfectly functional CEO for a million dollars a year, or that the one who is willing to work for that amount is worse than the one who needs 40 million to do the same job.

Hiring the lowest bidder CEO can't happen of course, because the boards of directors are comprised of CEOs of other companies, and supporting a bidding process would queer their own deals.

I think it would be interesting if someday a union went on strike and demanded a CEO bidding process as one small part of their agreement. They wouldn't get it, but I'll bet the CEO would be willing to settle the strike quicker to get that issue out of the public's attention.

[Update: The prior version of this post was put up during some computer problems, now resolved. -- Scott]

Comments

[zestypete]

Read up on Ricardo Semler.

http://en.wikipedia.org/wiki/Ricardo_Semler

[JT]

This is so awesome by Alsadius that I am just going to re-post it:

It's not a matter of the $40M CEO being 40x better than the $1M CEO, it's a matter of him being enough better to add >$39M of value to the company. For a billion-dollar company, that means he has to be 4% better. For a hundred billion dollar company(of which there are 25 in the world), a CEO getting paid $40M a year only has to add 0.039% to the revenues of the company to be a better deal than the $1M CEO. So, how do you think "fully qualified" should be determined to get at differences of that small a size? It seems to me that the best bet for a company like Wal-Mart or ExxonMobil hiring a CEO is to find the best person in the world and pay them whatever the hell they want, because if they're even the slightest bit better than the competition, they'll justify it. When your company is close to a full percent of the production of human civilization, you can afford to toss a few extra millions to the guy at the top.

You're right of course when you say that part of the problem is the rather incestuous nature of CEO selection and compensation decisions. Self-dealing is not the process best designed to get results for the wider community, and there are some real concerns about guys who certainly *aren't* 4% better getting paid as though they were. But the fact that the numbers are big does not automatically mean that the process is corrupt.

[Dave]

Someone mentioned about it being impossible to pick a good president, thus the same with a CEO.

Perhaps in voting / in picking a CEO, we should just follow my policy: Choose the person who will do the least amount of damage.

[JohnFx]

I find it amusing that you would pit one force of people (the unions) who resist treating labor as a free market to enforce it on another (CEOs).

The unions would never go for it because someone would realize that if it were applied to them a grocery store sacker would never make over $20/hour.

[Steve]

The reason the CEO's are paid such crazy "bailouts" is that is gives them an incentive to take maximum risk in pursuit of maximum profit.

This is not always a good thing, of course. But if a CEO were only paid $1m per year and risked being fired just because the economy was declining (which usually hurts almost all companies, no matter who's leading them) -- they wouldn't take very many risks at all, and there would be no economic growth.

It's a simple illustration in a basic finance class: http://www.slb.com/images/services/software/valuerisk/efarticle-Figure2.gif

Granted, this is for market portfolios, but apply the same logic to a company's projects and that's an "investment portfolio" of sorts. The "correct answer" is to find a good point on the upper boundary of that illustration. But the "corporate answer" is usually somewhere over in the red and orange dots (crazy risk taking) because if everyone else is getting the high return and you're safely over in those blues and greens, you look bad in the short-term, even if you might be doing something safer and saner in the long-term.

There's a great book about the completely irrationality of investors -- I think you'd love it, Scott. :)

[Fury]

Scott, love your work, it is the highlight of my morning.

While this is a great idea the type of personality that is drawn to being a CEO would never allow them selves to down bid just to get a job (I know this as I work with a lot of them). If anything it is the reverse, they put up the perception and company boards believe that they are a scarse commodity so companies bid them up. In reality CEO's have very little to do with profit particularly at very big long established companies (does anybody really believe that mining/oil company CEO's are responsible for the current boom that is inflating their companies profits and their bonuses!).

The government unfortunately is helping to drive this by making CEO's responsible for everything every person in the company does such that the more conservative people in this pool who might be a better CEO shy away from the risk from things going wrong that they cannot control.

As has already been mentioned, it is only the owner/CEOs that truely build a business and they obtain their rewards through owning most of the business from the outset (eg Gates, Jobs etc). Next generation CEO's are just desk warmers who rarely stay around long enough to make any real difference.

[Lamont Cranston]

Everybody knows that CEO's should be selected on the basis of hair. Who's got the best hair? Problem solved.

Lamont

[Mark]

[Scott, I believe you ask a reasonable question, but I think we should turn it around. What if we hired a new cartoonist for Dilbert every two years? What impact would it have on the strip? The products? The multimedia campaign?

Posted by: Furzyweb]

Well that's stupid. For a start, what you'd be getting is A NEW STRIP.

And that happens all the time.

Bill Watterson? Retired.

Charles Shultz? Gone.

and so on.

And, unlike a CEO, the artist making the creation IS MAKING THE CREATION. When was the last time you saw the CEO of ford make a Jaguar? Hmm?

Now if you'd asked "how about making way for a new cartoonist"? MAYBE that would be a more appropriate query.

[Mark]

[But what if the additional
$39 million for the CEO gets
shareholders an additional
$40 million profit? Then,
they're ahead by $1 million.

Posted by: Mark Thorson]

And what did the CEO *do*? Or was it actually some front-line staff that DID. So surely the 40M should be divvied amongst the people who MADE the 40M.

[Seano]

I used to work with a guy who had an idea that I reckon would be great. We worked in a decent sized company. His suggestion was that if a rank & file employee had an idea that went on to implemented, that quantifiably saved the company money, then the employee should receive a once only percentage of the saving in a bonus. For example, if you came up with a procedure that was implemented, & it could be proven you saved the company $1 million pa, you might receive say 1% of this or $10K. Of course he'd suggest this from time to time to management, & you should have seen the looks he would get. Never more than single syllable reply either. Management are quite capable of being frugal to ludicrous levels, on concern things. Just not stock options & pay. Don't get me started on the expensing of stock options, & the re-pricng of same. This is arguably worse than the salaries issue. At least with the salaries they stick there chin out & say we are ripping this much outta the company.

[Mark]

[That's it! Everyone should get equal pay regardless of what they do. What a novel idea...

Posted by: Garloo]

Two things: this is not new. At least at one point, Ben & Jerry's had two pay scales: them and everyone else. They were on twice the pay of anyone else and everyone else from janitor down to Head of Marketing had the same pay.

And why? Well if you think that pay is shedloads for naff all work as a janitor, YOU clean the toilets.

Having a janitor means your other frontline staff don't have to do it. If you had no janitor, you'd either be shut down or your higher paid staff (if this were a normal company payscale) would have to janitorial work.

[jim]

Is there a way to tie a CEOs compensation to the worker compensation? For example, a CEO could not make more than 100 times the lowest wage earner in the company. That would help make sure the lowest wager earner got at least $40,000 or so. Or ties it to 50 times the average salary paid to non-director employees. Something like that could work, no?

[Duncan]

I think you judge a CEO by their cost. If they charge too low, it lowers their status. As a board, you don't want to be accused of hiring a poor CEO just to save a dollar. The expectation is that quality costs and that good CEOs are worth the cost.

[steve]

The first problem is the cozy relationship between the CEO and the Board of Directors. We need more shareholder activism to hold the directors accountable.

Once the overpriced CEO market was established then comparable market values - (what other CEOs are making) justify these salaries. Stock compensation with a long vesting period in lieu of cash would help.

Performance pay is difficult. Think about the great results of the financial institutions up until the current year. Does XOMs CEO merit exceptional compensation or is the large profit realized from external factors (rhetorical question).

CEOs must be forced to think about the long term values, not just making a good latest quarter or year end picture.

One suggestion - flat tax compensation over $1m at 50%

[Garloo]

"I think it would be interesting if someday a union went on strike and demanded a CEO bidding process as one small part of their agreement"

I felt the same way about the recent writers strike. They should have demanded that actors be limited in pay. What's with that? Some actor gets a million an episode while the writer gets 10k a month (if shes lucky).

And of course the illegals should wildcat strike the rich who hire them to clean their gutters in order to get minimum wage up to $30.00 an hour. Why not?

That's it! Everyone should get equal pay regardless of what they do. What a novel idea...

[bbuddha]

I wouldn't expect you to feed into this wealth envy, achievment bashing mindset. What any employee is paid is between him and his employer, Period.

[wernman]

A brilliant thought at face-value, and for established companies it makes a lot of sense. I bet I'd be a great CEO for a million a year. They could fire me after a year if I did a bad job.

But then, many CEOs are the guy who started the company? Don't you have the right to profit from your own idea, hard work to get it started, etc?

[bruce wayne]

the ceo is the least valuable of all employees.
He does the least work and has NO chance of changing a companies culture

[DAnthrope]

And by "computer problems" do you mean "user error"?
We've all clicked submit/send and wished we had done a bit more proofreading.

/Thanks for continuing the blog even at the less-frequent rate. The haters who vowed to never buy Dilbert stuff again probably weren't buying any to begin with. Peace /D

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[Ian Smith]

I offer a CEO outsourcing solution.

We will provide you with CEO services on a results based offering. Payment will be due to returns and growth - if the company does badly we cost you nothing.

What's more, since we provide this service to multiple companies, you have the benefits of immediate access to our client network and integration that involves no golf courses.

If you can outsource call centres, marketing and financial analysis - why not outsource the one group you can never prove does an acceptable job?

[BobNL]

And for all the people that argue that the CEO salaries are justified because of their value for the company, how can you justify the pay-offs when a CEO 'leaves' the company that he just led into the abyss? Just thinking of some of the major banks of today.

[Naveen Sundar G]

I think the best way to choose a CEO will be a fight.

[BobNL]

This is a good example of why we need government intervention in certain places.

[D. Mented]

I wonder if there's a way to persuade the stockholders this would bring them more money....
D. Mented