As the Democratic Primary heats up, we’re almost certainly going to be hearing a lot about “rising inequality” and “a raw deal for working-class Americans” and “runaway greed in America’s boardrooms” and “two Americas” and “I served in Vietnam”— sorry, got carried away there. If you’re looking for a hot-button topic, CEO pay is one that gets blood boiling, often on both sides of the aisle.
(One wonders when one of Obama’s rivals will make hay of a fact noted by the Chicago-based sharp guys at RealClearPolitics:
Obama’s wife, Michelle, earns $45K a year sitting on the corporate board of Treehouse (formerly Dean) Foods, whose biggest customer is – you guessed it – Wal-Mart. Not to mention that Treehouse appears to have a bit of an executive compensation issue.
According to the article by Greg Hinz of Crain’s Chicago, the CEO of Treehouse earned $26.2 million in salary and stock options last year, making him the second highest paid exec in the state, ahead of the CEO’s of corporate giants Motorola and Abbot Labs. And three other execs at Treehouse made over $10 million last year, all working for a company with only $700 million in revenues.
Can you picture the John Edwards ads? “How can Barack Obama say he’s going to punish corporate fat-cats and rising inequality when his wife is part of the problem?” ) The Economist has a special report on executive pay this week.
I come to bury CEO salaries, not to praise them. But after reading the Economist’s report, I thought of a metaphor that helps explain why companies throw gobs upon gobs of money at their chief executive: The hiring process for NFL head coaches.
Usually, when a team needs a new head coach, it’s because they’ve had a disappointing season or seasons, and they see no hope that the old coach was going to be able to fix it. So the franchise is in a jam. Fans are losing interest, seats are going empty, the media is ripping them. They can’t attract free agents.
The quickest and easiest way to restore confidence and optimism for the future is to find a former head coach who has already won a championship. Generally, they need to be coaxed out of retirement, and they don’t come cheap – think Bill Parcells, Joe Gibbs, Mike Holmgren, Jimmy Johnson, Mike Ditka, George Siefert, Dick Vermeil.You can usually count the number of championship-winning coaches not under contract on any one time on one or two hands.
If a previous Super Bowl-winning coach isn’t available, the next-safest thing is to hire a veteran coach who has at least built winning teams in the past – a Marty Schottenheimer, a Tom Coughlin, a Dennis Green. (Tony Dungy may be jumping from this category to the one above.) There are few more of these guys, but again, they usually can command next-to-top dollar.
You can go with a highly-touted assistant coach from somewhere, or you can promote from within. (Lovie Smith has obviously paid off well for the Chicago Bears.) But generally, these choices are seen as a little riskier, and aren’t likely to persuade the fans, players, and the media that the team is going to get a lot better soon.
The problem is, coming in to manage a franchise that has been run into the ground and needs to be rebuilt from square one is not a terribly appetizing job. You know that the first year is almost certainly going to be spent on rebuilding; it may be two to three years before all of ‘your guys’ are in place, when you’ve got the right personnel for the offensive and defensive systems you want to run, etc.
So how do you persuade a big-name coach to risk his reputation, to leave the cushy network job behind? Most often, the only way is to throw money at him by the truckload.
(Bill Simmons wrote a fascinating examination of younger coaches and older coaches, and concluded the young, hungry guys might be a better bet.)
What applies to NFL franchises applies to the Acme Widget company. The CEO is the face of the organization in the way that a head coach is. A company that’s in trouble knows it can’t suffer too many consecutive disappointing years. Promoting from within or getting some little-known guy might work, or it might not. The safest way to ensure the company will get out of the slump is to get somebody with a well-established reputation, preferably by turning a company around someplace else. There are only so many of those guys out there, and Acme Widgets are competing with a lot of other companies eager to give them the big chair.
This isn’t to say that all of these guys deserve their massive bonuses, or that this won’t be a potent issue on the campaign trail. But an artfully contrarian candidate might be able to raise the inconvenient truth that executive pay, like everything else in this world, is set by supply and demand. If there were a larger supply of veteran chief executives who seemed a reliable bet to improve a company’s fortunes, there would be greater competition, and thus companies wouldn’t have to pay them so much.