Failure and Greed of American CEOs

This week, I read on The Daily Ticker that 25 of the top 100 highest paid CEOs had higher salaries than their company paid in federal income taxes.  This is the most bizarre statistic I’ve ever read.  I don’t know what is more ridiculous, that companies paid their CEOs so much or they paid so little in taxes.  Either way, it’s a slap in the face of hard-working Americans, who shoulder a heavy burden from the bailout of failed American companies.

Are CEOs that Valuable?

CEOs made 325 times the pay of an average American worker in 2010.  This is up dramatically from the 269 times in 2009.  The ratio was around 24-1 in 1965, 30-1 in the 1970s and 40-1 in the 1980s.  American CEOs are paid considerably more than their counterparts around the world, even though many American companies lag in performance.  For example, an American CEO makes 16 times what a comparable CEO makes in Japan.  The S&P 500 has been flat for a decade, while executive compensation skyrocketed.  So, the high-paid CEOs aren’t returning value to the shareholders either.

In my opinion, the excessive pay for CEOs is hurting companies and investors, instead of benefiting them.  Between the high pay, stock options, severance packages and outlandish perks, it is definitely hitting the bottom line.  Companies who have held the line on pay have had no problems obtaining executive talent or performance.  And they attract executives who are more focused on the growth of the company than their private jets and villas.  It’s only a matter of time before shareholders start to revolt against excessive pay.  I just wonder what is taking them so long.

Are CEOs Out-of-Touch?

One of my wife’s favorite TV shows is Undercover Boss, where the CEO goes undercover at their company to see how it is run from the bottom up.  If you have ever watched this show, it quickly becomes a rerun after a couple of episodes.  Every week the CEO struggles to keep up at work.  They befriend a financially struggling employee and keep a promissing employee from leaving the company.  The show almost seems like it was scripted by a PR firm.

Observations from watching Undercover Boss:

  • CEOs have no clue how daily operations run at their company.
  • CEOs fail at any job requiring technical skill, labor or hustle.
  • CEOs have no idea how hard it is for their employees to survive.

This leads me to wonder out loud if CEOs are worth even a fraction of their salary.  In fact, I will declare right now that most CEOs are not only grossly overpaid, they are marginal leaders and a poor value to shareholders.  The facts definitely back up my opinion.  There are still some great CEOs in America, but they seem to be few and far-between.

What Defines a Great CEO?

Not all CEOs are created equal.  Some are visionary strategists, fearless leaders and champions of corporate culture.  Some can turn a company around from failure to success.  Others are like the plague to employees and a parasite to shareholders.  They can run a good company into the ground in a very short time and make a fortune doing it.  Here are some of the best and worst CEOs of modern times and the exploits that made them famous or infamous.

CEO Hall of Fame

  • Steve Jobs, Apple Inc. – Increased stock price from $4.38 (adjusted) in 1997 to $376.187 during his second tenure. He launched products such as the iPod, iPhone and iPad.  He received an annual salary of $1.
  • Bill Gates, Microsoft – Increased stock from 9 cents (adjusted) in 1986 to $19.94 in 2006.  He stepped down from day-to-day operations to concentrate on philanthropy.
  • Jeff Bezos, Amazon – Increased stock from $1.50 (adjusted) in 1997 to $210 today.  He created the world’s largest online retailer which is nearly three times the size of its nearest competitor.
  • Warren Buffett, Berkshire Hathaway – Increased annual value to shareholders of 20.3% for the last 44 years.  He built Berkshire into the eighth largest publicly traded company in the world.
  • Sam Walton, Walmart – Increased stock from 5 cents (adjusted) in 1972 to $10.49 (adjusted) at his death in 1992.  He built Walmart into the world’s largest employer, retailer and company based on revenue.

CEO Hall of Shame

  • Ken Lay, Enron – Took Enron from $101 billion in revenue to bankruptcy in two years.  He was convicted of securities fraud, but died before sentencing.
  • Bernard Ebbers, MCI/Worldcom – Took company from the largest long distance carrier in the U.S. to chapter 11 in 5 years.  He is currently serving 25 years for $3.8 billion in financial fraud.
  • Angelo Mozilo, Countrywide – In mid-2000s Countrywide issued 15% of all home loans in the U.S.  He profited over $300 million by selling his stock ahead of the company’s collapse.
  • John Rigas, Adelphia Communications – Built Adelphia into the fifth largest cable provider in the U.S before bankruptcy in 2002.  He is currently in prison after being charged with stealing $100 million from the company.
  • Chuck Conway, Kmart – Brought in to turn around Kmart, which declared bankruptcy two years later.  He was charged with defrauding investors and accused of spending company money on planes and houses.
  • Dick Fuld, Lehman Brothers – Received nearly half a billion dollars in total compensation from 1993 – 2007, before he drove the company into bankruptcy.  There is ongoing SEC litigation regarding Lehman accounting practices.
  • Al Dunlap, Sunbeam – Known as “Chainsaw Al” he tried to turn around companies by laying off thousands of workers.  After being fired for accounting irregularities he was sued by shareholders and the SEC.

The Bottom Line

The bottom line is that executive pay in America has radically diverged from performance.  As companies search for proven leadership, they consistently overpay CEOs who under-perform.  Then, they overpay to get rid of them.  This has to change if America is going to remain a world leader in business.

“My administration is the only thing between you [CEO’s] and the pitchforks.”

Barack Obama – President of the United States

Recommended Reading

Online Investing AI Blog – Buffett: Stop Coddling the Small Investor
Business Insider – Starbucks CEO’s No Campaign Donations Pledge
New York Times – Where Pay for Chiefs Outstrips U.S. Taxes

This post was featured on the Carnival of Personal Finance over at Canadian Dream – Free at 45.  If you aren’t familiar with the Carnival of Personal Finance, you need to check it out.  There are dozens of amazing posts.

16 comments to Failure and Greed of American CEOs

  • Good performance should be rewarded and bad performance should be penalized. Unfortunately, that does not always happen in the CEO world.
    krantcents recently posted..Another 15 Coolest Jobs on the PlanetMy Profile

    • I definitely wouldn’t mind getting fired, with some of the golden parachutes these guys get. Some of them get mega millions, just to get shoved out the door, after they have ruined a company. I’m amazed sharegolders and the boards put up with these severance packages.
      Bret recently posted..Failure and Greed of American CEOsMy Profile

  • I agree, and if you ever get a chance, read about Merill’s former CEO Stan O’Neal. Stan actually said the job was easy, as he played golf all the time (or so it seemed like it). If it wasn’t for the market crashing, I’m sure he would still be the CEO today.
    Money Reasons recently posted..Our Net Worth Increased By 455% In A Ten Year TimespanMy Profile

    • Hi Money Reasons,

      I considered Stan O’Neal, Ray Nardelli, John Sculley and a bunch of others who deserved to be in the Hall of Shame. But, I had too many CEOs and I had to shorten the list. So, I picked the ones who bankrupted their company with massive fraud involved. It’s a pretty low bar, but there were still plenty of honorees.

      Like Stan O’Neal, I think a lot of marginal CEOs vastly overestimate their contribution to the company. It seems like taking credit for everything is what got them to the top. And, if it all goes wrong, they are the first ones to start placing blame.
      Bret recently posted..Failure and Greed of American CEOsMy Profile

  • Bret,

    Wondering how you’d rank your top CEOs? From your list I’d do:

    Gates, Buffet, Jobs, Walton, Bezos

    PKamp3 recently posted..A Nod to IronyMy Profile

    • Paul,

      It all depends on how you rank them. From an investor’s standpoint, it’s all about the ROI. And, in that case, I agree with your ranking. If you rank them based on corporate vision or technical genius, Steve Jobs is the man. But, from pure contribution to society, I would head the list with Sam Walton.

      These five guys in my Hall of Fame created millions of jobs and added billions of dollars to the world economy each year. Walmart employs over two million people worldwide. That’s like the entire populations of Dallas and San Francisco combined. Even though most of these are low-paying retail jobs, that’s still a massive contribution, especially in this down economy.
      Bret recently posted..Failure and Greed of American CEOsMy Profile

  • This theory is unsubstantiated but I get the feeling that part of the reason companies can afford to pay their CEOs so much is all of the tax breaks and loopholes. I’d love to get your thoughts.
    Cognoramus recently posted..The Patent Office: Your Guess is as Good as MineMy Profile

  • I get sick and tired of hearing about the CEO’S that are over paid. How much of a factor is a CEO as far as the performance of a business goes. MC donald’s went though three CEO’S and did not missed a beat. Some of these compensation packges are outright theft as far as I am concerned. Or you could say outright stealing. All the boards of these major corporations are composed of other CEO’S of other major corporations what a conflict of interest. I think its time to call these parasites what they really are. I think the evidence is crystal clear many of these CEO”S are criminals. I mean criminals just like the mafia. This is the sort of stuff that happens in latin america or some other corrupt country.

    • Thanks for stopping by Dennis.

      It depends a lot on the CEO and the company. Some are definitely worth it. Look at how poorly Apple did without Steve Jobs and how it flourished when he returned. He took a $1 salary, which shows he was more interested in the company than his perks. As for McDonald’s, I disagree. Ray Kroc built the company into an international powerhouse, while the McDonald brothers went out of business. But, these are examples of two extraordinary CEOs. I believe most are marginal today and they definitely don’t deserve the obscene salaries.

      As for the conflict of interest of directors, I completely agree with you. One of the things mentioned in the Daily Ticker article is that institutional investors, who own 70% of the stock, rarely go against the board’s recommendations. They need to step up and take a more active role to protect investors.

      The increasing criminal activity of some companies is a direct reflection of government corruption and poor oversight by regulators. The SEC is finally starting to crack down on securities fraud, but they were inept for many years.
      Bret recently posted..Failure and Greed of American CEOsMy Profile

  • Our company for years had a useless CEO. Unpleasant and with the social skills of a ferret. He was eventually shown the door, although not because of the company’s performance, which continues to excel. In fact, the company ran quite well as a little Switzerland, with all the independent division heads responsible for their P&L but conforming to a strategic vision. The current CEO is a 1000% improvement over the old one.
    101 Centavos recently posted..How I Make Money By Losing MoneyMy Profile

    • I worked for a company in the ’90s who had an interesting CEO. He wound up with a 151 foot yacht and 200 of my friends got laid off. They finally got rid of him and he left the country one step ahead of the IRS. He lives in South Africa now.

      The CEO at the company I work at now is awesome. He is big on team building and corporate culture. There are no department kingdoms or red tape. We are all cross-trained and step in to help each other out. Everyone is very friendly and professional. I don’t have to work with a single jerk, because they get canned pretty quick. I can’t tell you how much of a pleasure it is to work there. A good leader really can make a difference.
      Bret recently posted..Money Fail: Broke on ThursdayMy Profile

  • I like when the annual rankings of “CEO ROI” come out where they look at compensation vs actual company income or shareholder returns. I think BusinessWeek puts it out. Anyway, a company like Costco usually comes out on top where the humble leader takes a relatively small package compared to size of company/earnings whereas Financials and mortgage outfits reapded HUGE rewards while their companies failed.
    Darwin’s Money recently posted..What If Unemployment Benefits Were Structured as a Loan Instead of a Freebie?My Profile

    • Thanks for stopping by Darwin.

      Before I wrote this post, I watched an interview with the CEO from Whole Foods. And, he said they used to limit executive pay to 9 times that of an average worker. They have recently bumped it up to 15 times. He said they hadn’t lost a single critical executive they wanted to retain. Obviously, their management team has executed well. And, the profits are going back into the business, instead of the executive’s pockets. I am surprised more companies aren’t doing it.
      Bret recently posted..Money Fail: Broke on ThursdayMy Profile

  • […] and Greed of American CEOs @ Hope to Prosper. And we wonder why we are not growing as fast as we did […]

  • […] me every day tell me that things are really not that bad. Bret from Hope to Prosper presents Failure and Greed of American CEOs, and says, “25 of the top 100 highest paid CEOs had higher salaries than their company paid […]