CEOs Are No Corporate Saviors
November 17 2008 by Fayazuddin A Shirazi
While the outrage over excessive executive pay to poor performing CEOs is apparently justified, Mike Critelli, the former CEO and the outgoing Executive Chairman of Pitney Bowes, a Stamford, Connecticut-based provider of goods and services related to mail stream, believes it is a wrong notion to consider CEOs as corporate saviors. He says a combination of a good business model, right external environment and critical mass of talent is what it takes to make a business venture successful.
“What is unimaginable today is the degree to which shareholders, boards of directors, rating agencies, the media, and even the public believe that there are a handful of exceptionally talented CEOs that companies in trouble, or, for that matter, companies not in trouble but desirous of improving their results, should spare no expense in recruiting,” says Critelli.
Posting his thoughts in his latest blog post titled ‘Excessive Executive Compensation’, Critelli overtly finds fault with the thinking that CEOs who have been consistently performing well or have performed well in the past are actually the corporate saviors, which he feels is not true.
Commenting further, Critelli talks about how the GE alumni, who took over the reins of several organizations with hefty pay packages didn’t deliver the goods, since the business model of their respective organizations was not effective enough to produce desired results.
“The GE alumni, who received exceptional training and mentoring at GE under Jack Welch, as did Jeff Immelt, who are truly one of the world’s greatest business leaders, were obviously very talented. However, what went wrong for those who were less successful was as a result of the huge gap between their considerable talents and the unrealistic expectations from them,” Critelli points out, adding further, that when CEOs succeed, they may be catalysts for an organization’s success, but there needs to be a good business model, a critical mass of talent, and the right external environmental conditions.
The obvious question however, is that if CEOs are not the corporate saviors why do boards approve these hefty packages in the first place, reasons Critelli.
According to him beyond the flawed belief in the ‘corporate savior,’ the pressure on a board to recruit the best and the brightest, there are other subtle factors that drive up compensation in these negotiated contract arrangements.
While the executive search firms are retained by the company and are accountable to the board, Critelli who received a compensation of about $9.36 million in total annual compensation while in office as a CEO and Chairman of PBI, argues that the search firms also succumb to the subtle pressure to justify their lucrative fee by securing the ‘corporate savior’ for their clients. “They put additional pressure on the board by pointing out that the ‘corporate savior’ is being hotly pursued by other companies and boards, and that the board needs to act fast and accommodate his or her compensation demands,” explains Critelli.
Drawing similarities between excessive executive pay packages and the outsized contracts in professional sports, Critelli, known to be instrumental in doubling the company revenues from $3 billion in 1990′s to $6.1 billion in 2007 (during his 10 year tenure as CEO and Chairman of Pitney Bowes), strongly advocates the need for evaluating CEO performance by devising a mechanism which can gauge CEO performance.
According to him, the professional sports teams and the agents who represent players, have developed a methodology to determine the financial value of a player for a particular team, which he says, is conspicuously absent in executive pay evaluation.
“Business today lacks the kind of sophisticated tools, which can truly isolate the economic contributions made by a CEO. Though some companies have developed methods to this effect, it is still not easy to determine the economic benefits brought by the CEO, since there are a number of factors that influence company performance, including factors over which he has no control,” remarks Critelli.
Critelli believes the current populist environment will see heavy controls put on executive pay mostly determined through emotions and political calculations. However, he says that mere government regulations and a free market will not explain the realities of soaring executive pay.
“We must acknowledge that neither the free market nor government regulations offer a perfect solution to the perception of excessive pay. We need to draw upon tools developed for purposes other than pay evaluation and modify them as required for the executive pay analysis,” reiterates Critelli.