HP scandal helps to answer “What is a CEO worth?”

Posted by Marc Hodak on August 9, 2010 under Executive compensation, Revealed preference, Scandal | Be the First to Comment

CEO pay is generally discussed and debated from the point of view of more typical kinds of employees, from minimum wage teens to well-salaried executives, who work for what seem like arbitrary sums offered by frugal or venal owners, or their sometimes clueless representatives on the board.  At this level of the discussion, one loses a key distinction about pay in a market economy, i.e., that one should be paid about what they’re worth.  So, a relevant question in this debate that is never asked:  What is a CEO worth?

Mark Hurd’s sudden, surprise resignation at HP offers a rare hint to the answer; in after-hours trading shortly after the announcement of his dismissal, HP’s stock declined by over 8 percent.

Ladies and gentlemen, that’s over $9 billion dollars in market cap.

So, while various pundits might claim that every CEO is replaceable, the question remains:  at what cost?  The answer isn’t found in the much vaunted proxy disclosures on executive compensation.

That $9 billion figure is a discounted future cash flow assessment of Mr. Hurd’s value.  In other words, in the apolitical judgment of equity investors, the only people with the incentive to make this collective judgment correctly, the company would have been better off paying about $2 billion a year for the next five or six years to keep Mr. Hurd than to lose him.

In fairness to the board, the Mr. Hurd they let go, the man who broke the HP ethics code he had done so much to champion, was not quite the Mr. Hurd the investors thought they had before the Friday announcement.  There was a legitimate concern that the expense-fudging Mr. Hurd could no longer govern with the same authority he had before this unfortunate news came out.  But that’s not the point here.

The point is that the buttoned-down guy atop his Silicon Valley perch that HP’s investors thought they had was worth far more than the mere tens of millions that the media (check out the comments) and good governance types have regularly derided.

Update:  Stephen Bainbridge weighs in.  Larry Ribstein offers his take.