Chief Executives Are Underpaid

Dec. 21, 2004

Whenever I hear a debate about chief-executive compensation, Im reminded of the Arab emir who traveled to the U.S. to have a quadruple coronary bypass performed by a special surgeon. The surgeon was an internationally recognized expert and had performed many coronary operations with extraordinary success. But he was concerned about how much to charge the royal patient. If he overcharged, it might mean unfavorable international press and a loss of goodwill. But if he undercharged, the sultan would feel the operation was not serious enough to require this doctors special skills. The surgeon consulted his colleagues. He decided to charge $10,000. One of his friends then suggested that he ask advice from a lawyer who specialized in Middle East affairs. The attorney listened, pondered for a few minutes, and then recommended that the surgeon submit a blank statement with a footnote, "The sultan is wise. He can do no wrong." It was a risky suggestion. It allowed the sultan to determine the worth of the operation. The doctor decided to take the risk. Shortly thereafter, he received a check from the sultans royal exchequer for $100,000. The doctor was elated. But his euphoria lasted only a few days when he received a blank invoice from his attorney. It had a footnote: "The value of your expert surgical skills is exceeded only by the value of your expert legal advice." Thousands of words are written each year about compensation packages paid to chief executives. Often, they are depicted as outrageous, inflated, obscene, unconscionable, and undeserved. At the same time, professional athletes are paid millions of dollars each year without critical outrage from their fans. Why then shouldnt superstar chief executives earn what star athletes and star entertainers earn? If Sylvester "Rambo" Stallone is worth $20 million per motion picture, why isnt Michael Eisner worth as much or more as chief executive of Disney? If Steven Spielberg can earn $285 million in one year making movies, why should Bill Gates be criticized if he earns as much or more running Microsoft? If Michael Jordan is a $30-million-per-year basketball player, why shouldnt John Kluge or John Welch be $30 million chief executives running Metromedia and General Electric? Jordan, Stallone, Oprah Winfrey, and Spielberg have unique talents that attract people to pay to see them perform. But their major responsibility is to manage themselves and their unique talents. Eisner, Gates, Welch, and Kluge are expected to create wealth, produce profits, employ thousands of skilled individuals, remain competitive against the worlds best competition, and deliver growing value and dividends to their investors. When Jordan makes a mistake on the court, his blunders may result in a poor shot, a flubbed pass, the loss of a game, or, at worst, the loss of a championship. He still gets his $30 million. If Gates, Kluge, Welch, or Eisner err, their mistakes affect their reputations, the thousands of people who work for them, the millions of people who own their stock, and the millions who buy their products. When viewed in that context, who should be paid more -- Jordan and Stallone, or Gates and Welch? Since becoming chairman emeritus of my company, I see my years as a chief executive in a different light and from a new perspective. I find surprising satisfaction in being relieved of other peoples stress, pressure, and problems. I can take my own risks and be rewarded for my successes and be held accountable to myself for my failures. I am no longer second-guessed. Thats why if I were still a chief executive, Id either demand higher compensation or be self-employed. In other words, Id rather be a Michael Jordan or Oprah Winfrey than a Bill Gates or a John Welch. Michael and Oprah are being paid for having fun. Bill and John are being paid to achieve the companys goals and objectives. They have too many constituencies and too many people affecting their success or failure.

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