CEO Impact... and Pay

CEO and general executive pay is a hot button issue.  Several people, some of my favorite lean bloggers included, believe it is excessive and should be regulated.  I tend to believe that markets have a natural way of regulating excess and we're simply at a point where boundaries have been tested and the markets are beginning to react.  A few months ago we wrote about a recent example at American Express... is Ken Chenault's compensation package excessive, or truly progressive?

Here's a slightly different perspective from Donald Luskin's blog, The Conspiracy to Keep You Poor and Stupid, after which I'll get to my main point.

As [Xavier] Gabaix and [Augustin] Landier write in a new Quarterly Journal of Economics article, the sixfold increase in American CEO pay from 1980 to 2003 is almost wholly explained by the roughly sixfold increase in market capitalization of big U.S. companies over the same period. The trend lines of market capitalization and executive payouts rose and dipped in near-perfect tandem.

As companies get bigger, a talented CEO can have a greater impact. Therefore, large companies bid up prices across the board for the small number of men and women deemed capable of managing them. The reason CEO pay in other countries (such as Germany) tends to be lower is that the “big” companies abroad are generally smaller than the big companies in America. We do not yet have a global market for CEO talent.

That concept of "CEO impact" stuck in my head, only to be released when I read a recent post by Mitch in Value Acceleration where he discusses the GM/Toyota collaboration at NUMMI in Fremont, California.

And least our senior management readers get too smug, the authors also note that Toyota is the ONLY automobile company where changing the CEO has had NO impact on company performance. In other words, the processes the company uses are so robust, there is little noticeable effect on the company due to any single person change … even the CEO. They just keep relentlessly moving to #1 in revenue and profit.

Which is what you'd expect at Toyota, a company driven by process.  But the link of process to the impact of executive leadership, and the lack of change (and almost desire for a lack of change) that leadership can create, is a bit misplaced.  Is it a good thing?  In Toyota's case perhaps yes.  Would I want the same for GM or Ford?  Obviously no.  Although those two companies are slowly improving, my hope would be that a strong leader could create radical change... unhampered by the process. 

A process can be good in the case of Toyota, or as Megan McArdle pointed out in a recent The Atlantic, it can impede progress.  The process at the Detroit Three isn't as defined, wasn't based on maintaining efficiency, and definitely wasn't derived from lean manufacturing methods, but it is still a process.

All three of the automakers are crippled by their deals with the union, not just because of wage and benefit costs, but because the union tends to strongly resist productivity enhancements that might cost jobs. Yet none of the automakers has taken any sort of stand. The company and the union are like two skydivers trying to share a small parachute--locked in each other's arms as they hurtle to their death, because neither wants to be the one to let go.

For those companies to survive, a CEO needs to step up that can make a difference by having the guts and leadership to drive down a different road.  All three companies now have some strong leaders, especially Chrysler.  But will they be worth their pay?

Comments

[Mitchell Gooze]

Thanks for reading our blog and mentioning it in yours. We focus on the application of lean and other process management methods to the demand chain as they have been applied to the supply chain over the last 50 years.

Mitch

[Tony]

Process also has its limits - look at Toyota's design: the best that can be said about their cars is they're boring.

I think in some spaces such as consumer electronics, design is even more important - look at Apple.