In Praise of the Fedora CEO

CEOs today make an estimated 400 to 500 times the average U. S. worker. When they made just 40 times the average paycheck five decades ago, and apparently had about one-tenth the incentive they have today, it makes you wonder how anything important got done. They just helped to change the world. That’s all.

“It is not a coincidence that the Dow Jones industrial average, which stood at 5,000 in 1996, is now well above 13,000,” the authors write. “While U.S. executive pay practices do not entirely explain this rise, there is little doubt that it would not have occurred without them.”

That rather ambitious statement comes courtesy of a recent column by Joe Nocera, who, along with Gretchen Moregenson and Floyd Norris, form the New York Times troika of some of the most probing minds in business journalism. Mr. Nocera was quoting from his interview with Ira T. Kay, a compensation consultant whose name alone sets off visions of ever larger stock option awards dancing in the CEO head.  Mr. Kay is the author of a number of books on CEO compensation.  His latest, Myths and Realities of Executive Pay,  includes a quote by me.

I was always aware that most CEOs were possessed of, shall we say, a healthy ego and that many have attributed success in their companies to their own efforts. When the coin is flipped to the other side, however, they quickly back away from pronouncements of responsibility. As former Nortel CEO John Roth said after the bottom fell out of Nortel’s stock –that is, after he cashed in his shares for a $150 million pay day— “We don’t control the stock market.”

But in an even more breathtaking leap of ego, some, like Mr. Kay, who make their living by crafting huge and complex CEO pay machines, now credit high CEO compensation for gains in the stock market in recent years. And stock options have supposedly accounted for much of the incentive to bring about those record levels, he claims. Some of us were of the impression that forces like deregulation, the maturing of the baby boom generation in the workplace and consumer market, the rise in industrial might of China and India, free trade, gains in worker productivity, and expanding technology in manufacturing and communications had some role in this. No, no, no, it’s stratospheric CEO pay that did it. It’s enough to make one rather miffed at those slackers of yesterday like GE’s Reginald Jones, Dow Chemical’s Irving Shapiro or GM’s Alfred P. Sloan, for instance, who could have done so much more for investors and the world if they had only agreed with the virtue of greed and taken more off the top.

Readers will know that I have never been a fan of what I call the success by the singular CEO school of thought. But since we are talking about what has occurred on whose watch, some further observations seem appropriate.

CEOs today make an estimated 400 to 500 times the average U. S. worker. When they made just 40 times the average paycheck five decades ago, and apparently had about one-tenth the incentive they have today, it makes you wonder how anything important got done. Instead of focusing on the stock market, these fellows merely concentrated on such sidelines as helping the world through post-war trauma, implementing the Marshall Plan, retooling the North American industrial base from war mode to peacetime, preparing the workforce for the return of the greatest generation and the largest baby boom in history, inventing the suburbs, expanding home ownership to record levels, revolutionizing the auto companies, creating vast networks of arterial highways that link every part of the continent, inventing network TV and I Love Lucy, developing the jet airliner and the concept of mass market travel, bottling the nuclear genie into peacetime use in energy and health care, expanding the availability of life saving drugs for polio and measles and putting the miracle of aspirin into millions of medicine cabinets, creating the technology and organizational skills that saw the U.S. succeed in the race to the moon and making the spin offs of that race —including the miniaturization of electronics, the personal computer and the calculator— widely available in the mass market. They just helped to change the world, that’s all.

Funny, I don’t recall many of these executives taking credit for the progressive leaps of their era, however. Arguably, some had a handicap that does not seem to afflict most of today’s CEOs: a sense of humility and perspective that they wore as naturally as their fedoras. They didn’t demand or receive multi-million dollar paydays like the one we recently wrote about for Countrywide Financial’s CEO, Angelo Mozilo or the kind Yahoo has doled out to CEO Terry Semel over the past several years.

The value they helped to build was in real products and transforming innovation, expanding plants and creating the jobs that were the backbone of the middle class. Pale stuff, some might say, when set against the gains of the stock market in recent years and the rise of that most monumental of all modern business achievements: the hedge fund. There is also that rather yawning gap in income, which is now the greatest since the 1920s, along with the steady vanishing of the middle class. Did I mention the subprime debacle? Which CEOs would like to take credit for these feats of management agility?

I guess these old guys were just a bunch of impoverished wimps compared to their present day successors.

Bring back the wimps.