The Dollar-A-Year CEO

Posted by Marc Hodak on July 28, 2013 under Executive compensation, Governance, Invisible trade-offs | Be the First to Comment

I am often dismayed by the popular response to “dollar-a-year CEOs.” These bosses give the media a feel-good story:  You don’t have to be greedy.  You can be a not-so-fat-cat!

Apparently it’s not just John Q. Public–several times removed from the real world of compensation governance–that buys this stuff. Just last week, a tech company CEO in a WSJ “expert” panel praised the dollar-a-year standard, and the swell guys and gals who adopt it, saying that all CEOs should be so virtuous.

These are people that are out to change the world. They are owners. They are builders. They bleed for their company and what they are creating. It’s not about the money.

His examples were Steve Jobs, Larry Ellison, Mark Zuckerburg, Meg Whitman, Larry Page.  Do you see a pattern (besides all the money)?

With the exception of Meg Whitman, these are company founders. They identify with their companies the way most of us identify with our children. They didn’t have to be recruited to their positions. Not incidentally, their personal wealth varies by five to ten million dollars a day based solely on the movement of their company’s share price.

For these people, giving up several hundred thousand dollars per year in salary is far less heroic than you or I taking a dollar a day to lead, say, a regional medical center that we didn’t found, and that hasn’t already showered us with enough wealth to keep generations of our progeny in furs and Ferraris. In other words, a salary would not add to the reasons that these people show up for work, which is, after all, the reason that salaries are normally offered.

Meg Whitman is in a slightly different place, but her situation illustrates another absurdity of the dollar-a-year fetish. Let’s say that you had Ms. Whitman’s enormous talent and wealth, and were being recruited to lead a large, troubled company;  what would you think of the choice between $1 million a year in salary plus $15 million worth of stock and stock options versus one dollar a year in salary and $16 million dollar’s worth of stock and options? Keep in mind that you’re already a billionaire earning enough on interest and dividends to dwarf the $1 million in steady income that you would be “giving up.”

Feeling pretty indifferent, are we? I don’t know if that was the exact trade-off that Ms. Whitman was offered, but if it looked anything like this, she was surely savvy enough to understand that the $1 per year salary came with a huge bonus–a PR bonus.  Any CEO that could afford to give up that salary could not afford to give up that bonus.

What about CEOs that don’t walk into their positions as founders or billionaires? What about the ones coming in as hired hands with everything to prove, and everything to lose if it doesn’t work out in the first few years? In other words, what about the other 90 percent of CEOs of major companies? Do we really want these people to take a roll of the dice on the stock price, knowing that the largest chunk their personal fortunes would be on the line if anything should go wrong, including the possibility of far outperforming all of their competitors in an industry that happened to get uniformly hammered in a global sector downturn?

No. Dollar-a-year CEOs are appropriate for a very specific type of executive—the type represented by a relatively small list including Jobs, Ellison, Zuckerburg, Whitman, and Page. Among the many luxuries these people can afford, you can add the luxury of foregoing a salary without their board wondering if they are going to jump ship, or without the executive worrying that they will end up with a mere $140 million if things don’t work out.

Billionaire founders are uniquely able to indulge in the symbolism of $1 salaries. They can, if their boards are serious about compensation governance, likewise get away without huge equity compensation that would have no material affect on their incentive to perform.  Offering a huge equity package in lieu of salary belies the idea that “it’s not about the money.”

The reality is, it’s never just about the money, but the money is key.  Otherwise, we should see more technology breakthroughs by non-profits or collectives, and we should have seen greater results from awards for economic heroism in societies without opportunities to profit from one’s business genius.