Risk of Overcomped CEOs

Peter Drucker warned that any CEO-to-worker pay ratio larger than 20:1 would “increase employee resentment and decrease morale.” When Drucker died, in 2005, the pay ratio was at 15 x 20:1.

Far from having 300 times the intellect of the average tech worker, most tech CEOs are not remarkably intelligent (and the best ones know this). Author Nassim Nicholas Taleb points out that CEOs specialize in non-remarkable ways: "a combination of charisma, a capacity to sustain boredom, and the ability to shallowly perform on a harrowing schedule."

Ironically, CEO overcomp is most prevalent in sectors where CEOs rarely seem able to stave off disasters (and isn't that the main thing?). Most tech CEOs didn't foresee the Internet implosion of 2001. CEOs of FIRE (Finance, Insurance, and Real Estate) companies were unable to predict, let alone prevent, the credit bubble implosion of 2008 -- a catastrophric economic event that they enabled.

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Rationally speaking, if any leader would be worthy of 300:1 compensation, it would be a general, like Eisenhower, who led the Allies and won an important war. It would not be Gil Amelio (preceded Steve Jobs at Apple), or Dick Fuld of Lehman Brothers, or Carly Fiorina of HP. But generals aren't overcompensated, at least not until they become lobbyists for military tech.

Extreme CEO overcompensation is tolerated in America because Americans do not begrudge it. An American still believes that with hard work, luck, and timing, he or she can also be an overcompensated CEO.

CEO overcompensation will remain, due to the Matthew Effect: we tend to overcompensate those who are already successful -- whether politician, basketball player, CEO, or 80s rock star. Success assigns a "preferential attachment" to the winners. If you've reached the winners podium once -- whether through luck, skill, manipulation, or some combo -- you are perceived as better than your peers who have not. It takes much failure and bad behavior to ruin the "cumulative advantage" of your success, and knock yourself off the podium.

CEO overcompensation may be a non-issue. Overall, companies who overcompensate their CEOs in extremus perform no better, or worse, than companies that don't. But there is risk: overcomped CEOs are overconcerned with not failing, and go status quo -- don't seek good risk opportunities, tend to underplay newly identified risks. The overcomped CEO may be a poster child for corporate irrationality, but overall the unpredictability of markets trumps any risk presented by enormously overcomped CEOs.