Salaries keep going up for America's chief executive officers, in spite of a series of corporate scandals and a lagging national economy. According to a report released by the Corporate Library, an independent research group, the average CEO compensation package at a so-called S&P 500 company rose by almost 37 percent in 2002. That same year, earnings by the 500 companies that make up the Standard and Poor's Stock Index dropped by more than 23 percent.
If you talk to the recruiters and consultants helping to place executives with companies and negotiate their salaries, you'll hear the same refrain from most, if not all of them: You get what you pay for. According to these so-called "headhunters" there's a shortage of truly great CEOs in this country, and since a chief executive officer can make or break a company - the reasoning goes - compensation committees have to be willing to offer high salaries if they want to attract the best executives. But that argument is riddled with flaws, according to Rakesh Khurana, starting with the notion that CEOs really are that essential to the success or failure of a company.
"They perpetuate the myth that the most important factor that affects firm performance is who your CEO is, when in fact there is little, if any empirical evidence to even suggest that there is a CEO affect on firm performance," he said. "The factors that affect firm performance have much more to do with general industry conditions, general economic climate, and the strategy of the company."
A strategy that's formulated and implemented by dozens and dozens of people, not just the chief executive officer. In his book, Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, Rakesh Khurana argues that skyrocketing CEO salaries are the result of hype, rather than the simple market forces of supply and demand.
Professor Khurana said there's no shortage of corporate leaders in this country. He noted that business schools are turning out people with leadership potential every year, but said when they enter the work force, these graduates aren't necessarily being groomed to assume leadership roles, because companies are too busy trying to attract what Mr. Khurana calls "Hollywood CEOs" - people who have been highlighted and hyped by the business media.
"One of the things that we know about the business media is that personality sells. That most people would prefer to hear some interesting story about how some executive overcame a stutter when they were eight years old, rather than hear about a complex set of off-balance-sheet partnerships. And so the business media delivered what its audience wanted, which was human interest stories, and continued the maintain and perpetuate the myth that the CEO was the most important factor," Professor Khurana said.
He points to Cendant's Henry Silverman and Home Depot's Bob Nardelli as two media darlings who have benefited from all the attention. According to Fortune magazine, Henry Silverman got a 41 percent pay increase last year, even though Cendant's stock dropped by 47 percent. Bob Nardelli got a three million dollar bonus when he signed with Home Depot in 2000. That bonus wasn't contingent on the company's performance and that turned out to be a good thing for Mr. Nardelli, since Home Depot's stock has dropped by more than 43 percent since he took over. But Rakesh Khurana said business media attention isn't the only reason CEOs have been able to command higher and higher salaries.
He said there's also the reality that the compensation committee of one company is often made up of CEOs from other, similarly-sized companies. "The candidate is not sitting across the table from someone who wants to pay him less. Because CEO salary is often set across companies of comparable size, or in a comparable industry, if you end up paying the CEO of one large company like IBM more, it is very likely that you'll see a positive impact on the CEO of a company like AT&T," Professor Khurana explained.
In the wake of the corporate scandals of 2000 and 2001, the federal Securities and Exchange Commission began to look at the issue of executive compensation, how it's determined and by whom. Beginning in 2004, companies will be required to have completely independent auditors, otherwise they'll be barred from trading on any U.S. stock exchange. This rule, however, does not prohibit the CEO of one company from serving on the committee that hires and compensates the CEO of another company.