Comment on: Fun With Statistics, CEO Life Edition

In the US, CEO’s tend to be fairly interchangeable these days and it is rare for their tenure to exceed five years. There are some notable exceptions such as chain-saw Al and Neutron Jack, but in general a change of CEO doesn’t seem to do much over the long term. This is one of the criticisms of American CEO’s they seem to be more interested in feathering their nest and getting out quickly rather than running the firm for the long-term benefit of all the stakeholders. Another useful comparison would be with Japan where top decisions tend to be much more based upon consensus and not as dependent on the American Superstar model.

Wouldn’t being “less and less critical to the long-term success of the organization” make it more and more difficult to justify salaries that would make a King jealous? If the USA CEO’s are less critical why are the USA CEO’s paid the highest (and most unbelievable crazy) amounts? I have thought for years CEO pay in the USA has nothing to do with their “worth,” this seems one more piece of evidence for that belief.

Today, in the USA, CEOs are basically win the lottery when they start and then either win some more and stay or don’t win and are let go. The lottery performance appraisal aspect Deming talked about (rewarding whoever random variation or macro economic and micro economic trends smiled upon during the period). So if a market (housing, oil, steel, investment banking, microchip, hotel…) is booming why give all the CEO’s in that market huge payoffs? What do they have to do with the economic boom in the entire market? Why pay them a lottery sized payout when a boom occurs? Occasionally a CEO may help make decisions that position the company to take advantage of a predicted boom particularly well (such a case could at least trigger a discussion on the worth of that action).

We also have to recalibrate Deming’s comments to say regular performance appraisal raffle winners. CEO’s are now actually getting $40,000,000 – lottery sized – annual pay so using the term lottery is a bit misleading for everyone else. The same issue hold though rewarding people for what is often just micro factors similar to the macro factors listed above for CEOs.

Warren Buffett on overpaid CEO’s:

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.

Related: Deming on performance appraisal – Excessive Executive Pay – Obscene CEO Pay – No Excessive Senior Executive Pay at Toyota