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The CEO Crisis

It’s been open season on CEOs lately but when luminaries like management god Peter Drucker start taking aim at top managers you know something real and serious is taking place. Here’s what Herr Doctor Drucker had to say about today’s CEO in the January 12, 2004 issue of Fortune Magazine, “…the compensation inflation for CEOs has done very real damage to the concept of the management team. In an executive program I have at Claremont, the typical students are general managers of major divisions at very large companies, and they are very well paid. But it's fair to say they are contemptuous of the excessive pay that many of their CEOs receive. It's the midlevel management that is incredibly disillusioned. And so the present crisis of the CEO is a serious disaster.”

These are very strong words indeed. The fact that they come from someone like Drucker – the father of management science - make them all the more alarming. Unfortunately, he’s not exaggerating. Here’s some data that supports his case. The October 11, 2003 issue of the Economist states, "In 1980, the average pay for the CEOs of America's biggest corporations was about 40 times that of the average production worker. In 1990, it was about 85 times. Now the ratio is thought to be 400." A study by Towers Perrin in 2000 showed that chiefs at big U.S. companies earned 531 times what their hourly employees did, on average. The next highest was Brazil at 57 times.

In its October 25, 2003 issue, the Economist magazine cites data showing average CEO compensation rising from $175 per dollar of net profit in 1996 to over $500 in 2001.

What are CEOs delivering in return for their stratospheric and ever-escalating pay? One would expect phenomenal performance. Don’t hold your breath. Researchers at the Harvard Business School found that CEOs account for only 14% of the performance of a business. That’s right – eighty-six percent of what drives results has nothing to do with the guy at the top. The industry sector in which you operate for example, accounts for 19%. That means just showing up in the marketplace has a greater impact on performance than the average person in charge.

Shouldn’t CEOs be expected to deliver far more than a paltry 14% of the firm’s performance given their huge compensation? Or if you believe business is a team sport as I do, wouldn’t it be fairer for CEOs to have their pay and perks recalibrated to better reflect their contribution to performance? Shareholders rights activists and investment fund managers have been challenging CEO pay excesses for some time now and some have proposed caps on top manager compensation and open disclosure and voting on their pay.
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I‘m not trying to trivialize the importance of the CEO but let’s be real - there are too many puffed-up egos in the executive suite that take a disproportionate share of the credit (and rewards) for success while dodging any real accountability for failure. Their worst-case scenario is to leave with sacks of severance pay “to pursue other interests” only to reappear tanned and rested somewhere else for another round of “stump the chump.” This is not leadership, it’s gamesmanship. And shareholders, workers, customers and communities are the perennial losers.

Fortunately there are many top-notch CEOs leading corporations today. In this space during the coming months we will spotlight several Next Generation Leaders and describe how their progressive styles of leadership and behaviors are helping to set new standards of workplace performance, accountability and fulfillment.

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Tony DiRomualdo is a business researcher, writer, and advisor with Next Generation Consulting. He works at the intersection of people, business strategy, and information technology to help companies create a committed and high performance workforce. Tony can be reached at td@nextgenerationconsulting.com.

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The opinions expressed herein or statements made in the above column are solely those of the author, & do not necessarily reflect the views of Wisconsin Technology Network, LLC. (WTN). WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Comments

John Morrison responded 9 years ago: #1

It is depressing to open the Wall Street Journal, and to see every few days, another fa-cat "top manager" receiving bails of severance for his incompenence and/or malfeasance. We have a problem, Houston.

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