Globe and Mail reports huge earnings for S&P 500 CEOs, the average is in the vicinity of $10 million per annum. Larissa Meyer, until a couple of years ago worth only a million a year is laying claim to close to $60 million this year.
Is this food for thought?
Earlier this year I confronted a question in graduate business school classroom. ‘Why is there a proliferation of leadership literature in google searches in recent years?’
Neither the students nor the elderly professor mentioned astronomical bonus earnings of CEOs as a possible lure. The standard business school version is that leadership is not only about creating shareholder wealth. In reality, though, that is the paramount question.
I remember President Obama taking up issue with Wall Street for what he thought were excessive bonuses in 2009 when the US and global economies were struggling to recover from the Lehman Brothers collapse.
The companies were giving away $20 billion in bonuses at that time! Unconscionable? Well, in the light of economic theories that we learn, I think not! Why do I think so? It is the theory of why picking up a hypothetical $100 bill from the road is not advisable! Paradoxical as it might seem, this theory is the core of corporate finance theory that in a mature market there are no arbitrage or free money opportunities. It is well night impossible to find free money, so the question of picking up $100 doesn’t even arise!
However, free money, or ‘abnormal profit’ as it is called, is available when a company enters a monopolistic regime with a competitive advantage either in innovation or in cost savings. The CEOs and business leaders are supposed to be bringing in this cutting edge and the compensation for generating such a competitive advantage has to be really super high, don’t you think?
In other words, there is no super company that churns out profits unless someone is paid super bonuses as sufficient incentive to innovate.
The bottom line is, the leader creates wealth for the shareholders and takes away a sizeable chunk for himself or herself. Everyone is happy. Only the outsiders who are neither the shareholders nor the CEOs themselves will complain. Unfortunately, Obama is in that group.