Wow, do those CEOs make big bucks! The median pay package is about $8.4 million a year. That's a lot of money, but the companies that hire them believe it's worth it because these leaders know their stuff. They can make the right calls.
Well, maybe not so much.
A new book, The Drunkard's Walk, takes a look at the randomness of life. Among the things author Leonard Mlodinow studies is business leaders. Looking at Fortune 500 firms, Mlodinow suggests that over time, they are subject to the same random events that affect us all. So, if they are right 60 percent of the time, over five years, 333 of them will "exhibit performance that did not reflect their true ability." What's more, he says the chances are 1 in 10 that any one of the CEOs will have a winning or losing streak that runs five consecutive years.
So much for earning that big salary, eh?
Mlodinow suggests instead of hiring leaders based on their supposed insight into the marketplace, boards of directors should judge the person's basic management skills. If the person is a good manager, they'll have winning years and losing years, but the average should be good.
That is unless the CEOs believe their own press. Like those folks who ran the financial services firms and decided to forget about the basics of whether people could repay the loans being made and "went with their gut."
The Arizona Republic notes:
Twenty big financial firms that got caught on the wrong side of the credit crunch suffered nearly $500 billion in cumulative stock-market losses last year and have brought the economy to the brink of recession.
Yet these firms still managed to shell out about $215 million collectively in compensation to their chief executive officers last year.
There's nothing wrong with paying company leadership big money -- note that I said big money, not the obscene money they're getting now. CEOs and other top officials carry a lot of responsibility and the jobs take their tolls.
But instead of paying them for what we want them to be -- mystical managers who have special insight that the rest of us lack -- let's pay them for what they actually can do for us: provide good solid management.
That's where the value is. That's what people can reliably produce and that's what serves investors best in the long run.
-- Jim Grinstead
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