Friday, February 09, 2007



A few years ago I was discussing insane CEO salaries with a colleague.[1] I wondered why it could possibly be necessary to pay them so much. Does the CEO really make that much difference? If they paid me 10% of what they pay the CEO, wouldn't the company run about as well? I mean, the CEO doesn't do it him/her/itself — there's a whole organization going about its business, and I could just step in and say, “Yes, carry on as you have been, you're all doing a fine job,” and then collect my million or two while I handle the job mechanically.

My colleague said, “So what you're asking is whether leadership works. It does.” And, indeed, there's been a lot written about that, about effective (and ineffective) leadership. And I've been a manager, and I know that one's leadership style can affect things. But it's hard to get one's head around how much of a difference it can make, really. And then, two summers ago, I got a first-hand example.

Two summers ago, I enrolled in a one-day class at the Culinary Institute of America, what we locally call “The CIA” with a nudge and a wink. The class was about cooking with garlic. It started with a lecture about garlic (details about the plant, the different kinds of garlic, things to do and not to do when cooking with it), after which the instructor presented the menu — everything from appetizer to dessert made with garlic — and we split into groups and went into the kitchen to cook.

As the chef was going over the menu, two women sitting near me said they wanted to do the garlic sausage. So did I, so I suggested joining them, and we had our team — the guy sitting behind them joined us also, later. The chef started going around the room asking teams which dish they wanted to sign up for, and as he hit the first team I heard others talking about the sausage. So as soon as the first team had signed up for their stuff, I just piped up and said, “Jane and Sally and I will do the sausage.” That worked fine, and the other group in the back renegotiated amongst themselves.

After we got the “intro to the kitchen” briefing we were left with our pile of ingredients and our recipe, and we were set to make our sausage. And there we were, the four of us, standing there. Looking at the meat and the garlic and the casings, and so on. Standing. And looking.

And then I said, “OK, I'll chop the garlic. Jane, why don't you [do this], and Sally, you [do that]? And Bill, would you [do the other thing]?” As I picked up the knife to start my task, the others all instantly went about theirs, happy that someone had taken the initiative and gotten us started. It hadn't been a question of what to do — we all knew that, and we had ingredients and a recipe staring back at us. It had been a question of organization. Who would do what, what would get done first, how would we go about it? It had been a question of leadership.

A minor case, to be sure. No doubt, if no one had said anything, someone would have started a task soon enough, and we'd have gotten ourselves rolling anyway. But having someone in charge, even in such an informal way, did help the process. It got us going quickly. It kept us focused and gave us direction. It even provided a place to go for decisions: at one point, one of the women (I forget whether it was Jane or Sally, but those aren't their real names anyway) came to me and said, “Why don't we divide the meat in two, and spice them differently?” “That sounds like a great idea to me! What do the rest of you think?”, I said. The rest agreed too, and we actually wound up doing three flavours. But as the self-appointed “manager”, I was where she went with her suggestion.

How does that relate to the original question? In the class, we had no organization but in a company with a new CEO the rest of the organization is still in place and working. Nevertheless, there'll be a time when assignments have to be given, new direction needs to be set, decisions must be made, for which the existing organization isn't set up. Yes, it can run for a while on the status quo. Eventually, though, CEO Leiba would have to stop playing World of Warcraft and start earning his two million.

And that's when we'd find out why they're better off paying ten times as much to someone who knows what she's doing.

Oh, and everyone loved the sausage. Everyone loved pretty much everything, in fact, except that the garlic fudge was pretty odd and didn't set right.

[1] I meant for “insane”, here, to modify “salaries”, not “CEO”. Stop that!


Ray said...

And that's when we'd find out why they're better off paying ten times as much to someone who knows what she's doing.

Ten times, I don't particularly have a problem with; it's when the multiples get obscenely out of whack that the equation fails - for me, at least. When we're looking at CEOs and other execs making hundreds of times what the average worker makes, then I believe there is something seriously wrong.

Barry Leiba said...

Ah, but we are talking about hundreds of times (just using orders of magnitude here). I was considering what would happen if you gave me an order of magnitude greater salary, and that was still an order of magnitude less than that of the CEO.

In case it's not clear: I don't get a million dollars a year now, more's the pity.

Maggie said...

Why should anybody's salary be that out of proportion with the average? Even a factor of ten strikes me as ridiculous, particularly when it isn't tied to success. And by "success," I don't mean higher profits, I mean value to society. A CEO who lays off a bunch of people and eventually runs his company into the ground can still get a hefty severance package. (Psst... "Shrub.") Why? It's sickening.

Yes, he has a managerial skill. Dandy. He still needs the varied skills of all the people who work for him to actually get the work accomplished. Why is his skill that much more valuable?

You've made an argument that a manager is a valid job. I don't think you've made an argument that they're more valuable than the rest of the people in the company.

Paul said...

What burns my beagle is paying these CEOs millions of dollars to go away. I just can't fathom sitting in a board of directors meeting and saying, "The company is being run poorly. Bigshot President isn't doing a good job. We need to fire him...and pay him six point seven million dollars severance."

nina said...

The New Yorker (source of all goodness in the world) just had an article about CEO pay and it mentioned the fact that CEO salary is set by the board and that many folks sit on different boards and they are all friends of each other and owe each other favors and so it appears the salary levels has much more to do with a sort of crony-ism than anything else. I'll see if it's online.

nina said...

I found it. Here it is if you're interested.

The Ridger, FCD said...

You know - it's just not necessary. For instance, Costco CEO James Sinegal makes only 10 times the pay of his typical employee. His annual salary is $350,000, compared to about $5.3 million awarded to Wal-Mart’s Lee Scott.

Costco Wholesale Corp., now the fifth-largest retailer in the U.S. While Wal-Mart pays an average of $9.68 an hour, the average hourly wage of employees of the Issaquah, Wash.-based warehouse club operator is $16. After three years a typical full-time Costco worker makes about $42,000, and the company foots 92% of its workers’ health insurance tab. (source: lra online at

It's just not necessary to pay that much. It's done by the people who have decoupled the stock market from reality and who think that the only thing that matters in the universe is shareholder profit.

Sib. said...


What burns my beagle is paying these CEOs millions of dollars to go away. I just can't fathom sitting in a board of directors meeting and saying, "The company is being run poorly. Bigshot President isn't doing a good job. We need to fire him...and pay him six point seven million dollars severance."

If I am not mistaken, severance packages are decided upon not when the CEO is being fired, but when he/she joins the company. Much of it is already in the contract and there's nothing much a board can do after the fact. What would be useful, is to make the final payouts and bonuses depend on the performance of the company and increased/decreased value to the shareholders...

Also, I think that higher salaries for higher posts in an organization works well to motivate workers to go that extra mile. Studies have shown that monetary enticement probably work best as encouragements. Also, the hike has to significant enough that its worthwhile to try and climb the proverbial ladder.

scouter573 said...

Like the manager of a sports team, the CEO is expected to set the tone and direction of the entire company. This is not an easy task, so a high rate of pay seems reasonable. It also seems reasonable to tie the "reasonable" pay of the CEO to the performance of the company. Sadly, this is rarely done. Oh, sure, it shows up in the press, lots of Wall Street people get quoted asserting such a link, and CEOs are granted options that seem to make the tie real. But recent studies have shown that it really doesn't happen. There are always special benefits and gifts - uh - bonuses that completely dilute any such tie. (Doubt me? Take a look at the back-dating of options - thousands of companies did it -- why would that be reasonable in the first place? Even if it seems to also be illegal?)

My real point, after this bit of a digression, is that the Boards of Directors are responsible. The CEO reports to them. The separation payments in the contract are set by the BOD. There is usually a special subcommittee of the BOD for Compensation. So the answer is to make these people accountable. This is the why there is a push to get independent members on the BOD - members who are not selected by the CEO and that do no work for the CEO, the Company, or the BOD members.

Who was it that said "follow the money"? Is that an echo?