How much is a CEO worth?

Posted by Marc Hodak on September 8, 2010 under Executive compensation, Reporting on pay | Be the First to Comment

Eddy Elfenbein, commenting on the market reactions to Hurd leaving HP then showing up at Oracle:

But an interesting question is, how much does a CEO really add to a company’s business? When you get right down to it, I don’t believe it’s that much. Steve Jobs, sure. But others, I’m not so sure. I think culture and where the firm and industry are in their life-cycle can also be very important.

By my judgment isn’t what counts, it’s the market’s and Oracle’s market value has increased by $8 billion today. Henry Blodget notes that that’s about half of the $14 billion that HPQ lost when they fired Hurd.

Elfenbein makes a good point about the market value impact of Hurd’s departure and arrival.  Not so much about his personal sentiment that CEOs are not worth “that much,” although he expresses a widely held sentiment.

Those market value changes he cites–$14 billion drop at HP and $8 billion gain at Oracle–imply that Hurd is worth about one percent per year in return on capital to those respective organizations (Oracle happens to be about 8/14ths the size of HP).  Is it possible that a CEO besides Steve Jobs can make a one percent difference in a company’s return on capital.  Anyone who really doubts this (once they have the numbers in front of them) is pretty clueless about business and management.

In a rational world, knowing the reality of how much the best versus the next-best CEO can be worth should eliminate the deep concern of couch-bound critics about whether or not the board should have “given away” that last few million to keep the boss.

HT:  John McCormack