The cult of the CEO

What is a CEO?
A chief executive officer is the head manager of a company. He or she determines the company’s business strategy, and makes sure it is executed. In any publicly traded company, the CEO works for the “owners,” who are the shareholders, and their representatives, the board of directors. The board hires the CEO and oversees his or her performance. For most of the 20th century, CEOs were bland, pampered, cautious, largely anonymous men who worked toward building market share and achieving steady, long-term growth. During the 1980s and 1990s, CEOs became the rock stars of the business world, with outsize personalities—and incomes to match.

What changed?
James Surowiecki in Slate.com says it all started with Lee Iacocca. In the early ’80s, Iacocca took over as Chrysler’s CEO, when the automaker was bankrupt and had been given up for dead. “His marketing pizzazz, coupled with a not-so-subtle appeal to nationalist sentiment,” says Surowiecki, “revitalized Chrysler’s image and got the company off its deathbed.” A massive government bailout also helped. Iacocca was celebrated on magazine covers as the hero who saved a big piece of America’s auto industry, and his memoirs topped the best-seller list. After Iacocca, a long string of celebrity CEOs and business wizards were lionized—Ted Turner, Donald Trump, Michael Eisner, and Warren Buffet, to name but a few. The man and woman on the street followed their careers and their advice. As CEO fever rose, boards of directors began passing over the bland, anonymous guys already on the team, and pursuing star power. To get it, they were willing to pay handsomely.

How handsomely?
Like cult leaders. Star CEOs, in the past decade, were paid incredible sums of money, ranging upward from $50 million a year, embellished with stock options, cars, planes, boats, and other perks. It was a change of geometric proportions. Two millenniums ago, Plato argued that nobody in a community should make more than five times what the ordinary worker earned. In the 1980s, management guru Peter Drucker said that the differential should be no greater than 20. But at that time, the cult of celebrity CEOs was already taking hold, and the top guy was making 42 times the lowest-paid worker. By 2001, CEOs were making a whopping 411 times what the average worker earned. To get a sense of what this means in real dollars, consider that the highest-paid executive in 1987 was Iacocca, who earned $20 million. Last year, Oracle’s Larry Ellison pocketed $706 million. Over the past decade, rank-and-file wages went up 36 percent; CEO compensation went up 340 percent.

Why did directors permit this?
Several reasons. In the military, generals often prepare to fight, the last war; in business, the bidding war for CEOs was a reaction to the last corporate crisis—the hostile takeovers of the 1980s. Those takeovers usually took place when a company’s share price fell too low, so boards began hunting for CEOs with a track record of boosting a company’s stock price. This often became a self-fulfilling prophesy, if only temporarily: The day Michael Armstrong was named CEO of AT&T in 1997, the price of the stock rose so sharply that the value of the company increased by $4 billion overnight. Some boards did worry about paying CEOs too well, and sought to align the CEOs’ interests with those of the shareholders.

How did they do that?
By granting CEOs stock options—the ability to buy a specified number of shares at a low price. The idea was that if the CEO did a good job and got the stock price up, he could exercise his options, buy the stock low, and sell it high. Of course, this same goal could be accomplished just by giving the CEO the stock outright, but that would have to be reported as an expense. Options don’t.

Did it work?
In many cases, no. The problem with stock options is that they encourage short-term thinking to an unproductive degree. “Today’s CEOs are like professional athletes—relatively young people with short, well-compensated careers that are terminated once they cease to perform at exceptional levels,” business consultant Charles Lucier told The Boston Globe. The rule of thumb among CEOs is that they have five quarters in which to prove themselves. The consequence is that CEOs will do a lot to keep the share price high. At Enron and WorldCom, that included shockingly dishonest behavior.

Why didn’t boards cap options?
CEOs had all the leverage. As Harvard’s Rakesh Khurana discusses in his new book, Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, CEO search committees usually nominate only candidates who have been CEOs. That vastly narrows the field, giving the few viable candidates great leverage to strike a good deal. Once a deal is negotiated, it has to be approved by the board, which is frequently composed of CEOs or ex-CEOs, who have a strong bias toward paying CEOs huge salaries.

What can be done?
Congress could require companies to expense stock options; boards would then be far more tightfisted with them. Boards could also stop hiring name CEOs; if they hired from within, says Khurana, the top man or woman would be far less expensive, know the business better, and more likely do a better job. In the end, many of the star CEOs have bombed, including Jeffrey Skilling at Enron, John Sculley at Apple, Tim Koogle at Yahoo, and Frank Biondi at Viacom.

Money isn’t everything
In addition to their princely salaries and majestic stock options, star CEOs enjoy perks worthy of a king. Ex–Tyco CEO Dennis Koslowski, now under investigation for possible tax fraud, may have had the ultimate executive perks. The Wall Street Journal says the company gave him $135 million in unreported compensation, including loans to buy luxury homes in New York and Boca Raton, Fla., that he never paid back, and a $13 million “gift” from the company to pay off the taxes on his forgiven loans. He also used company funds to buy a $6,000 shower curtain, a birthday party in Italy for his wife (featuring singer Jimmy Buffet), and a yachting “consultant” to help sail his 130-foot racing sloop. Ex–Vivendi CEO Jean-Marie Messier had to settle for a $17.5 million Park Avenue pad with a wine cellar. Former Global Crossing CEO Robert Annunziata got a Mercedes Benz SL500, a corporate jet for commuting to his job, and first-class airfare for his family, including his mother, to come visit him once a week. E*Trade executive Jerry Gramaglia’s contract called for the company to buy him a trash compactor, a refrigerator, and a garage-door opener.