Nancy F. Koehn is a historian at the Harvard Business School. She is also a director for Tempur Sealy International and Fashion to Figure.
Why are so many chief executive compensation packages so outrageous? And why do they continue to roar ahead of most workers’ pay?
According to data released this month by executive-salary tracker Equilar, the 200 most highly compensated U.S.-based CEOs in 2013 received an average pay package of $20.7 million — including salary, cash bonuses, stock-based awards and other benefits. Each of those 200 executives took home more than $10 million in total compensation. At the top of the chart, Cheniere Energy’s Charif Souki pocketed $142 million, Mario Gabelli of GAMCO Investors was awarded $85 million and Oracle’s Larry Ellison took home $78 million. In the 1950s, the ratio between chief executive remuneration and that of a typical worker in the company was about 20 to 1. Today, the ratio between the pay of Fortune 500 chief executives and that of the average employee in these organizations exceeds 200 to 1.
Blame for this disparity is often directed at boards of directors, particularly their compensation committees. Most board members of public companies are themselves well-paid executives, so they have incentives to approve large pay packages for men (and the many fewer women) who are effectively their peers. Compensation consultants also play a role. By analyzing pay levels at comparable firms and reporting the findings to board members, these hired guns help sustain prevailing levels of pay. From the outside, this may look a lot like cronyism or poor corporate governance, and no doubt both are at work.
But while it is tempting to vilify the senior ranks of corporate America, most of the executives I have studied, interviewed and worked with during the past two decades (including my present activity as a director for one public and one non-public company) are upstanding, forward-looking individuals with a sense of proportion and responsibility about their organizations and their roles. Most are not trying to “take the gold off the table” for themselves or deny their employees fair pay.
They are, however, operating in a system that presumes the contribution of a good senior executive is very, very high. It is a system that rests on the Great Man theory of history: a school of thought that attributes virtually all important developments through time to heroic individuals.
Think back to Jack Welch’s 20-year reign as chief executive of General Electric. He was lauded as a corporate leader and management guru who, seemingly single-handedly, grew the company’s revenue and market capitalization many times over. Before long, GE had become a synonym for Jack Welch (or was it the other way around?). Small wonder, then, that when he stepped down in 2001, the company awarded him a severance package of $417 million, the largest payout in history.
Such lionization is misplaced. Operating a sustainable enterprise, as any executive, manager or employee knows well, is inherently a team sport. Across companies and industries, this activity depends on many people working in concert in all kinds of groups, at all levels of the organization. Such interdependence means that it is hard to precisely delineate, much less quantify, any one individual’s contribution, even that of the most senior manager, to a firm’s performance.
We haven’t always given so much credit to business leaders. French economist Thomas Piketty argues in his new book, “Capital in the Twenty-First Century,” that sometime after 1970, society became more tolerant of once unacceptably high levels of executive pay, because American culture — and senior executives and corporate boards in particular — embraced a notion of superstardom or super-leadership or super-merit for a small number of powerful leaders, including athletes, celebrities and chief executives. Some of the rapid growth in executive pay is a result of increases in company size, market valuation and complexity, Piketty writes. “It is also possible,” he continues, “that the explosion of top incomes can be explained as a form of ‘meritocratic extremism,’ ” in which certain individuals are designated winners and are rewarded more generously if they are perceived to have been selected on the basis of intrinsic merits rather than birth or background.
By the late 1980s and early 1990s, Welch, IBM’s Lou Gerstner and even the financier Michael Milken had become celebrities of a new kind, with influence that extended far beyond their respective companies. In 1992, for example, Ted Turner was named Time magazine’s Man of the Year, the first executive to receive that honor since 1955. In 1999, Amazon founder Jeff Bezos (now owner of The Washington Post) was named Time’s Person of the Year, followed in 2010 by Facebook founder Mark Zuckerberg. More recently, Yahoo chief executive Marissa Mayer has attracted all kinds of attention for her corporate decision-making (and parenting practices).
As a historian trying to parse America’s enthrallment with superstars, I keep coming back to the Great Man theory of history. Popularized in the mid-19th century by the Scottish essayist Thomas Carlyle, this concept holds that history is largely attributable to the actions of great individuals, who because of their personal (and often mysterious) qualities — such as intelligence, wisdom, deftness, goodness and energy — use their agency to make a big impact. “In all epochs of the world’s history,” Caryle wrote in his 1841 book, “On Heroes, Hero-Worship and the Heroic in History,” “we shall find the Great Man to have been the indispensable saviour of his epoch.” Carlyle includes Muhammad, William Shakespeare, Martin Luther, Napoleon and Samuel Johnson on his list of heroes.
U.S. history is replete with Great Men — from Abraham Lincoln to Franklin Roosevelt to John F. Kennedy— who are credited with changing the nation’s course. And yes, Lincoln mattered a whole lot in navigating the country through the Civil War. But he did not act alone. Other individuals, such as Gen. Ulysses Grant, and organizations, such as the War Department and the Union Army, also played vital roles. Of course, the social and economic institution of slavery was hardly the result of one person, either.
There is perhaps no more powerful example of the Great Man theory being applied to executives and compensation than former Apple chief executive Steve Jobs. Beginning in the late 1990s, after his return to Apple, Jobs came to be seen as more than a decisive leader trying to turn around the company he helped found. For many people, Jobs was Apple. His creativity, fanatic attention to detail, demeanor, focus, health, capricious hiring and firing, even his black turtlenecks were deemed critical to the strategic vision, execution, market performance and future of what became for a time the world’s most successful technology company.
Jobs was rewarded handsomely for his work at Apple. Although he earned only $1 in annual salary, beginning in 2000 he was granted huge amounts of stock-based compensation — some of it backdated to make it more lucrative. For the six years ending in March 2006, his compensation totaled $646 million. Super-managers, it seems, deserve super pay packages.
Certainly Jobs was a hands-on executive who demanded great control over all kinds of decisions, tactical as well as strategic, at Apple. He was also a big thinker who imagined products and possibilities that many others did not yet see. But he never flew solo. Jonathan Ive, Tim Cook and scores of other individuals, acting mostly in teams, determined not only how the iPod, iPhone and iMac were made and came to market, but also how they were initially envisioned and created. The story of business impact, and thus performance, is more complicated than our collective infatuation with specific individuals would suggest.
There are many problems with applying the Great Man theory to executive performance and compensation. Perhaps the most serious issue is the role that executive compensation is playing in rising income inequality. With strong evidence behind him, Piketty argues that skewing income inequality is largely a result of wage inequality, and that wage inequality is being driven primarily by “the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms.” By matching U.S. income-tax returns with corporate compensation records, Piketty compiled key information on the top tenth of the top 1 percent of the income distribution between 2000 and 2010. Between 60 and 70 percent of those individuals, he found, were top managers — not celebrities, not athletes, but the “super heroes” of corporate America.
If we want to slow — or better yet, reverse — accelerating income inequality, the most powerful lever we have to pull is that of outrageous executive compensation. And at a deep but fundamental level, we need to collectively recognize that the Great Man theory of history is too simple and too expensive for the more interdependent world of the early 21st century.