Derek Jeter can do for the Yankees what very few people can do. CEOs, on the other hand, rarely set themselves apart from the rest of us with their talent and skills.
by Eric Falkenstein, contributor
Derek Jeter has had a great career, but last year he hit .270 (mediocre). Nonetheless, he's fielding offers like $45 million for 3 years.
Yet no one seems very angry about exorbitant pay in athletics, as compared to CEOs. Here's Holman Jenkins over at the WSJ:
Said one fan on a New York paper's website: "As far as the money is concerned, I really don't care what they pay him. It's not my money." If it were catching, this healthy-minded attitude toward the paychecks of our fellow man would make the world a better, happier place.
Jeter clearly has alpha in a narrowly defined sphere that most of us recognize. We can see he is good at what he does--much better than us or most anyone else--and thus he earns his pay. In contrast, the suspicion is that CEOs are merely involved in a massive crony-capitalism game that discriminates against those who don't have the right family and friends. That strikes many as unfair.
Former Clinton Attorney General Jamie Gorelick made $40 million while running Fannie Mae (FNMA) and the mortgage market into the ground. Rahm Emmanuel made $16.2 million in his two-and-a-half-years as an investment banker. Bob Rubin pocketed $150 million while working for Citigroup (C). The list goes on and on (recent OMB director Peter Orszag was just hired as an investment banker by Citibank). These are problematic because we know they are getting paid merely for access--Rubin claims he was totally unaware Citi had $54 billion in mortgages on its balance sheet, which was probably true--for getting the right person to answer a phone, or bury some exception in the latest 2000-page bill or trade agreement. That's a game not available to most of us.
But then there are (relatively) unconnected CEOs who merely make too much. Merrill Lynch CEO Stanley O'Neal made $46 million and $48 million in 2006 and 2007 respectively, and then got a $161 million severance package after Merrill was sold for a song to Bank America (BAC). As noted in 'The Devils are All Here', he golfed every day, and basically had no idea what was going on related to mortgage exposure that would destroy his firm. Managers of large firms are rarely the brightest and best (exceptions usually being founders), but rather someone of steady temperament.
The CEO is often a compromise between conflicting groups. He must be blithely ignorant about the inconsistent objectives articulated to the team, such as trying to simultaneously prioritize innovation and tradition or a strong sexual harassment policy and a really fun Christmas party. People who are really good at logical puzzles or who excel at something are often not very good at managing people because they cannot, or will not, suffer fools well.
Thus, in spite of conspicuous examples where the highest IQ person is both an idea generator and the boss such as Larry Ellison or Bill Gates, in general the functions involve different skill sets. The result is a leader in a modern reverse dominance hierarchy who is paid to keep the peace and make people feel good, as opposed to make really important strategic and tactical decisions. It's a skill, but not one worth tens, let alone hundreds, of millions of dollars.
We don't mind inequality when we know it is for true alpha. What bothers people, and I think rightly, is when people are getting paid when they really do not have alpha, in that their ability to chair meetings, spout cliches at group functions, or golf leisurely, is something anyone could do. In contrast, if we played shortstop for the Yankees we know the team would suffer. It's a problem I don't have any solution for.
Eric Falkenstein is an economist who specializes in quantitative issues in finance: risk management, long/short equity investing, default modeling, etc. Follow him on his blog, Falkenblog.
Capitalism dictates the salaries of everybody...and remember, nobody forces you to buy anything like cable or buy a product that enriches a CEO or a company...remember that its your choice to watch ESPN/Cable...and is it your money? darn right it is, but you parted with it willfully by buying the product...
As a finance professional of 20 years, in my experience the author does have a valid point in some regards. The old 80-20 rule holds true for CEO's; i.e. only about 20% of them are truly good at their jobs, the other 80% are mediocre or worse. In other words, 80% of them add no value, and the lower-ranking people who are actually executing business processes have more impact. In my eyes the standards are different and much more demanding for CEO's - you either add value and you're therefore worth some multiple of that value, or you don't add value and you're worthless.
If you really want to make these overpaid and underperforming CEO's look bad don't compare them to a baseball player.
Use Alan Mullaly as an example. He took minimal pay and most of his compensation in stock when Ford wasn't doing well, and demanded the same of all his senior executives. Ford still has a lot of work to do, but the company is as well run as one might expect from a major corporation.
The majority of the money these players get paid does not come from ticket sales. It comes from the products you buy and the monthly cable bill you pay!!!
The fan who stated he doesn't care what these players get paid because it's not his money is mistaken. We all pay, whether we watch sports or not. I read an article that said 70 to 80% of my monthly cable bill goes towards paying the likes of ESPN and other sports stations whether I watch them or not.
@davidl@umn.edu: Board of Directors can't run the daily operation of a company. Being a director is a part time gig, most of them are CEO or high ranking officers of other companies. Thus yes every company need a CEO, and no, having a board of director doesn't mean you can go without one.
Let's see who has more responsibility, a person hitting and catching a ball, or someone responsible for the livelihood of potentially thousands of employees that support families. I'm not saying all CEO's deserve what they are paid, many should not be in the position they are in and boards of directors need to do a better job with this, but CEO's take on much more responsibility. Again, the few bad CEO's get the media print but what about the 1000's of good CEO's - responsible for hiring people! Someone needs to be in charge and take the heat. Compensation in the perfect world should be based upon the level of responsibility and total value someone adds to society. Compensation is often based upon market forces. Jeter is paid what he is paid because our culture and society values baseball and his talent that much. Understand it is mostly Yankee fans that are indirectly paying him. The true value an athlete like Jeter can add to society is being a role model for kids, and that is where most athlete's "drop the ball".
I'm strangely compelled to ask the question, what qualification does the author have in making the assessment? It appears the author is trying to put more literature out to promote his own concept of "alpha" as described in his book rather than supporting the assertion made in the article title. In fact, the article title is not supported at all by his analysis. Instead of speaking to "most" CEOs, he simply highlights a few very well known CEOs as examples (both "good" and "bad").
I am sorry but your analogy is way off. Eric I would not trust you to be my shortstop but I also definitely would not trust you for being my ceo. If you think that anybody could do the job then you are starting off in the wrong foot.
DJ doesn't have to manage thousands of employees. His skills are really individual. Arod can't help him hit the ball. Not really a fair comparison.
Should a high performing CEO make as much money as a baseball player - yes. Who benefits, besides the CEO, when the do their job well, all the stockholders. Who benefits when a baseball player does their job well, the baseball player and the owner. Whose success impacts more people, the CEO.
Do we really need any CEO's??? A lot of companies have a board of directors and that seems o works just fine....
This author sounds jealous that he's not getting paid big $$$$ for his alpha.
Just saying!
Baseball players, hollywood types,etc., way overpaid. Any fan that thinks it's not their money better check their cable bill. I say, lower the salaries and lower the prices all around. Why does anyone need all that money anyway?
Amen Brother!
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