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Deconstructing COMPENSATION

Why who is worth what.

In 2005, Johnny Damon of the New York Yankees was given a four-year contract that paid $52 million.

In 1930, Babe Ruth, the greatest baseball player of all time and a national hero, earned the then princely salary of $75,000 per year to play for the New York Yankees, the dominant team in baseball. Ruth’s salary was an unprecedented amount of money at the time, the equivalent of about $800,000 in 2005 dollars. In 2005, a solid but not sensational baseball player by the name of Johnny Damon jumped from the Boston Red Sox to the New York Yankees (as had Ruth decades earlier) and was given a four-year contract that paid $52 million. That’s $13 million per year for Damon, or roughly 16 times the salary that Babe Ruth earned.

As businesspeople, the owners of baseball teams, all of whom made their oversized fortunes in other industries, are extremely savvy. They are not wont to waste their money nor do they often overpay for anything. A fair conclusion, then, must be that even though current baseball players earn stratospheric salaries, far more than their predecessors could ever have dreamt of earning, they are generally paid what they are really worth. How can this be? How can Johnny Damon be worth 16 times more than the legendary Babe?

The rationalizing answer, of course, is not limited to baseball or even to sports but in fact probes deeply into the economic nature of our contemporary world. The answer resides in three intersecting current trends that, when combined uniquely in our times, have transformed our world: the power of media, the increase in discretionary time and the commercialization of fame.

·          The unifying power and all-pervading presence of the media. The present power of media, which saturates and structures national and even global consciousness, is so strong that it molds, almost instantly, common perceptions and attitudes in tens of millions of people. This means that because of the media-the Internet, cell phones, television, radio, magazines, newspapers-knowledge has become all-pervasive and virtually common carriage, and it is this collective consciousness that amplifies the impact of celebrities.

·          The dramatic increase in the percentage of time that most people spend on activities that are not directly related to work, personal care or family needs. Such discretionary activities include entertainment (in the broadest sense), news and information, recreational activities and the like. Taken collectively, such discretionary activities consume the greatest amount of people’s time and therefore direct a good deal of the money being spent on products and services. Even people with modest incomes can avail themselves of the best entertainment and information through television and the Internet.

·          The importance of public recognition. Since much of the world’s commerce is now driven by consumer products and services, and since in a competitive market economy individual consumers make their own selection decisions from among competing products and services, the success of these products and services has come to be related directly to their public recognition and perceptions. This means that there is now a clear correlation between public attitudes and commercial success-the greater the awareness of the public, the greater the profits of the companies. Simply put, this is the commercialization of fame, which has become one of the overarching trends in the contemporary world.

There is another factor operating in the creation of celebrity: the enduring fascination that people have with other people. Human beings relate more to other human beings than they do to anything else. In a natural catastrophe, the intimate story of one family who suffers grievous loss is intensely more compelling than gross statistics that X thousands died and Y thousands were made homeless. Empathy relates more to our emotions than to our intellect. This behavioral instinct is bred in our brains. (For years, the most popular section in Time magazine was its one- or two-page section called “People.” The “People” section was so popular that executives of Time Inc. enlarged it into the weekly magazine called People.)

Let’s revisit the New York Yankees and the seemingly outrageous salaries that they pay their players. Because baseball is popular and ubiquitous, it commands a great deal of the attention of tens of millions of baseball fans. This means that a great deal of money is derived from these fans, much of it through advertising, as they attend games in stadiums, watch games on television and read all the newspaper stories devoted to baseball. And since teams that win are worth far more than teams that lose, by paying large salaries to moderately good players, a team wins more and therefore is worth more. It is estimated that the New York Yankees are worth over $1 billion! (Note that the term “fans,” which has come to mean those people who express frenzied enthusiasm in their devotion to favorite sports teams or to celebrities, is derived from the word “fanatics,” which means those who hold extreme or irrational beliefs particularly about politics or religion.)

The same question of huge compensation can be posed about those who play tennis or basketball (consider Yao Ming’s salary of $75 million over five years), star in major motion pictures and, yes, manage large corporations. It is a mistake to assume that celebrity is limited to entertainment and sports personalities. Celebrities are everywhere that public recognition amplifies power or impact. This means that politicians and business executives, just like Hollywood actors and professional sports stars, can become celebrities. This is because they affect public consciousness, such as when business leaders are featured prominently in the national business media, and they in turn are enhanced by such public recognition.

The unifying factor is that celebrities must be perceived to be “stars” or “superstars,” outstanding performers who command the interest or attention of huge masses of people, or who are able to exert major leveraged influence in their fields of endeavor. Usually these people are super-achievers who succeed in whatever they do. Yet their achievements, however large, are not the predominant factor in their attaining celebrity status. The critical celebrity-making factor is that they imprint public or corporate consciousness in some unique and sustaining manner.

There is something recursive and self-fulfilling about such imprinting. Corporate executives who achieve high recognition in the business media develop a kind of mystique, irrespective of whether they deserve such fame initially but which nonetheless thereafter enhances their capacity to effect change and really make a difference.

A celebrity is someone to whom masses of people pay attention. Sometimes they are substantive people like, say, Stephen Hawking, the wheelchair-bound physicist whose insights into black holes changed scientists’ understanding of the universe. Sometimes they are frivolous types like, say, Paris Hilton, she of prurient videotape notoriety and occasional jail time. Sometimes they are both substantive and frivolous like, say, Bill Clinton, whose public persona, as even his critics admit, is riveting. Sadly, terrorist leaders threatening civilian populations become “celebrities” more easily than, say, altruistic saints helping those who are starving. (The same is true of demented criminals, such as serial rapists and killers. In fact, a law had to be passed to prevent criminals from profiting financially from their crimes by selling book or film rights to their vile stories.)

Yet it is another mistake to assume that celebrity, whether on playing fields or in boardrooms, is something disreputable. Of itself, celebrity is neither good nor bad. Celebrity is morally neutral as it acts as an amplifier and plays an increasingly outsized role in shaping modern society.

Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior adviser at Citigroup and editor-in-chief of China’s Banking and Financial Markets: The Internal Report of the Chinese Government. His articles on how to optimize investment banking products and services, are posted at http://www.chiefexecutive.net/Investment.

About robert lawrence kuhn

Dr. Robert Lawrence Kuhn is an international corporate strategist, investment banker and expert on China. Since 1989, he has worked with China’s senior leaders and advised the Chinese government on matters of economic policy, industrial policy, mergers and acquisitions, science and technology, media and culture, Sino-U.S. relations, and a variety of international business matters. Dr. Kuhn advises leading multinational companies, CEOs and C-Suite executives, regarding formulating and implementing China strategies in a variety of sectors, including science and technology, energy and resources, industrial, media and entertainment, healthcare / medical / pharmaceuticals, consumer products, and financial services. He works with major Chinese companies on structuring their capital markets financing and M&A activities.