Why CEOs Are Overpaid Too Much

The New Yorker's James Surowiecki's column on executive pay suggests that corporate boards are falling victim to what Keynes called "animal spirits," flocking behavior, which more transparency will do little to dampen. I reflected on this problem during the 2009 recession; Surowiecki may well be right, but there is another fact of the "knowledge economy" he might factor in, namely, the astonishing enrichment of young entrepreneurs enabled by global software.

The most interesting chart showing the connection between executive compensation and company performance--also, I suppose, the arguable importance of executive retention--is the one I saw proudly displayed on a bulletin board at Motorola corporate offices in Schaumberg Illinois in 1994. George M.C. Fisher, the company's widely admired Chairman and CEO, had resigned without warning a few months before to take over at Eastman-Kodak. By all accounts, Motorola had paid Fisher about $5 million and Kodak offered him $100 million in salary and stock options. He was known as a technologist who was also subtle about people and talent--a good man all round. Nevertheless, Motorola's stock price hardly budged at the announcement of his departure and had recovered completely by the time I was there. "If one leader could matter that much," I was told, "then the leader could not possibly have done his job right."

Investors, like the Motorola executives I talked too, were shrewd to shrug off Fisher's departure, much as some regretted losing his friendship. It would be a great mistake to look at Motorola's subsequent difficulties and attribute them to his leaving any more than attribute Motorola's meteoric ascent in the late 1980s to his taking over from (the more justifiably legendary) Bob Galvin. Make no mistake, I admired Fisher a good deal and liked him personally so far as I knew him. One of the reasons he was widely admired was that my fellow Harvard Business Review editor Bill Taylor and I had published an in depth interview with Fisher in 1989. (He spoke about Motorola becoming interested in an IPO. I joked, lamely, that it was curious why Motorola would bother with the Israel Philharmonic Orchestra. But he laughed and laughed anyway.)  

Anyway, largely because of the Galvin family's legacy, Motorola was very much a place of team play. The corporate culture celebrated, without apparent cynicism, practical engineering, customer service, employee development and cosmopolitan openness. You walked around the Motorola cafeteria wearing a gold identity badge if you accumulated patents; Motorola was mentoring the public schools. By 1989, the company's various people had all but invented the cell phone industry, the corporate university, six sigma quality, and were the first to open up the Chinese telecom market. Fisher had contributed to all of these things but was by no means responsible for them. Even as CEO, he sat in a "two-in-a-box" relationship with the COO, Gary Tooker, who took over from him within hours of his departure. Nobody (as Bill Taylor later put it) is as smart as everybody. 

And Fisher's subsequent run at Kodak was not distinguished.  He probably did better than some other leaders would have, given how the advance of digital technology creatively destroyed Kodak's photography business (much as it destroyed the market for Motorola's analog phones, by the way).  But Fisher certainly did not "turn the company around."  Four years later, his $100 million had shrunk to less than half because of the decline in Kodak stock--a decline that forced him to cut thousands of jobs, but not, revealingly, his own salary.  Fisher is now, and has been since 1996, the most powerful director on the board of General Motors. Enough said.  

I'VE BEEN THINKING of Fisher's record, what with the dust-up over AIG bonuses. Okay, who hasn't wondered if America hasn't become what Bedford Falls would have become if George Baily had just taken Mr. Potter's money. Then again, Potter offered $20,000 a year, not $2 million.

I have no doubt that Fisher remains an honorable man, as fascinated now about how things work as he was back in Bell Labs in the 1970s, when he toiled away, ahead of its time, on the video-phone. He was probably less drawn to the money than to proving himself, that is, without the Galvin family's prestige blowing at his back. Still, there was a hubris here that feels somewhat beyond Frank Capra's imagination. How did a decent man leading an inventive, collaborative company, someone already earning a hundred times what a public school teacher earned, get up one morning and tell himself he was actually worth 2000 times this?

Ideas about ordinary Mephistophelean bargains seem unimaginative here, for somebody was willing to pay him. This was not just about his weaknesses for power. Greed shmeed.

The real question is, how did we get to a public standard that considered business talent in this way? Wall Street, Sinclair Lewis knew, was always just an exaggerated version of Main Street. So how did Main Street--or even HBR readers--get comfortable with the idea that most every senior business executive should be earning something like, say, Mick Jagger?

I know this is complicated, but I think that little acronym IPO is relevant here.  I remember Ted Levitt, HBR's chief editor, coming into my office one day back in 1989, brooding as usual, but also chewing on an insight, the revolutionary qualities of software. Suddenly, he said, the brain's logic can simply be embodied--"externalized," he said--in film full of electrons. You make it for one, and you've made it for a million. The "marginal cost" of adding a customer, he might have added, is more or less zero. Need I add that this was the time Microsoft stock, and Bill Gates' net worth, was beginning to make MBAs drool? 

And Levitt's vision was prophetic in its way. Launching a software company, or a product with a large component of software, paid you back much the way a hit record did.

Suddenly Peoplesoft took off.  Suddenly we had Siebel and Netscape. And then Yahoo and Google and Pets.com. What this meant for the business class was that young people did not get just rich. They got hyper-rich. You made it for one and you were making it for a million--or a billion, if you included China and India and Brazil. Twenty-somethings were making more than the entire management of a Fortune 500 company put together. 

TO BE SURE, Tom Wolfe had already written Bonfire of the Vanities, and Michael Milken had already copped a plea. So it was not as if we lacked other, less savory models for enrichment. But I don't believe that George Fisher, or AIG executives for that matter, really saw themsleves as masters of the universe, trading and trading, making cut after cut on mega deals. I think they saw themselves as selling "products," indeed that they were making the world more stable. But I think they also assumed that, in joining the heights of the business class, they had entered a kind of magical kingdom spreading east from Silicon Valley; the top centile which a "new economy" decreed was worth the bottom 99; a place where, as in a successful IPO, a million gets you 100 million, where exponents replace multipliers.    

It may be time to start radically increasing marginal tax rates above, say, Fisher's original $5 million. It may be time to start capping the management salaries in public companies. It may be time to stop permitting stock bonuses for performance spanning less than, say, four years. It may be time for transparency and shame. But the blockbuster logic of software and entrepreneurship and IPOs will, if anything, get stronger as the web becomes ever more pervasive.