Contributors

Friday, February 07, 2014

The Explanation

Herewith is the explanation that was asked for:

Corporate boards are populated by executives of other corporations. To set salaries for executives they form "compensation committees" consisting of themselves and their underlings. They conduct "salary surveys" of other corporations to determine what appropriate levels of compensation should be.

The boards then tell themselves that to attract (or maintain) marvelous corporate leadership, they need to set compensation a bit higher than the median. CEOs are constantly fired when the stock doesn't perform. But every time CEOs change seats in their game of corporate musical chairs, no chairs are removed: the salaries are just increased.

Thus, companies see an endless parade of CEOs whose salaries just keep getting higher and higher, while cycling the same old cast of characters through various executive suites and boardrooms across the country.

This inflationary spiral would be deemed completely unsupportable for maintaining a high quality labor force, but since each large corporation only has a few dozen execs, keeping the best talent around is "worth it."

The problem is that, when you add up the cost of all that compensation for the entire executive team, it starts to add to hundreds of millions to billions of dollars for the bigger companies. To pay for it, employees are laid off. Wall Street rewards the company by running up the stock price, lauding the CEO for his "tough management style" and "increasing productivity."

And the thing is, the average CEO is simply not worth what they're being paid. I've personally known CEOs, and they're just regular guys. The vast majority of them are not any smarter or faster than you or me. Most of them got where they are by being someone's son, someone's college roommate, or someone's drinking buddy. A rare few got there by being brilliant, innovative, hard-working. Almost all of them created nothing; most are just hired guns.

The only people who can make a claim that they deserve the big bucks are the real innovators, like Bill Gates or Steve Jobs. But those guys are usually ill-suited to running a corporate bureaucracy; innovators and entrepreneurs are frustrated and stifled by the demands of shareholders and "Wall Street expectations."

The one thing most CEOs do have in abundance is the ability to project confidence. Corporate boards just love a CEO who projects confidence. But, just like all those confident and exciting boyfriends that so many women seem to fall in love with, only to find out they make absolutely terrible husbands, these supremely confident CEOs make absolutely terrible managers.

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