CEOs, actors, sports stars and pay for performance

CEO pay in the U.S. is out of control, by some people’s definition. It far exceeds the 10x factor that some practitioners claim is reasonable for CEOs to make vs the lowest paid employee in the company. CEOs and management in government functions have seen pay increases that defy logic in many cases. The average school board “chief” in California makes more than the governor of the State. Many people feel that CEO pay has gone berserk because of the super star factor.

If sports stars and celebrities can make millions of dollars per picture or per season, why should a CEO not make the same? If the star of the movie is not constrained to making 10x what the “best boy” makes, why should a CEO be so constrained? One can argue that if the movie or the team fails, the super star takes the hit. Not so. Many a team has hired a supposed superstar, given them a multi-year contract and found they could not produce. Many a box office draw actor or actress has been part of a movie that bombed. And the CEO of Netflix and his team were paid very well last year, despite their efforts to mess up the company.

Boards of Directors, team owners and movie industry executives are often caught in the same dilemma. How can they “assure” results? Hire a superstar is the American solution. And we can see examples of that. Basketball tends to work that way, unless you are the LA Lakers and you can’t get your superstars to agree to play together. Movies can work that way, and the Yankees can’t decide how many superstars they need to win. Billy Beane found that he could field a great team without so-called superstars. Problem was there is a lower limit to the talent you need to win.

Pay for performance is a tough problem for managers, comp committees and owners. Once people have performed elsewhere they expect you to pay for their proven potential. But does a single CEO really make that much difference? Ask HP. Is a CEO worth as much as Leonardo DiCaprio or Angelina Jolie? Depends who you ask.

But if we are going to pay superstar talent a lot of money, then superstar (even if only in their own minds) CEOs will expect the same.


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