In the last 20-25 years college football and basketball coaches salaries have risen significantly. Those are the two “revenue sports” in college athletics which usually fund all the other sports played in intercollegiate athletics. In addition, success in those sports helps with gifts to universities for not only athletics, but other things as well. So when a Division I program in a major conference has head coaching vacancy, it’s a big deal since most believe that the head coach is the main determinant of success on the field. So what makes a good head coach? Super star players don’t always work out as head coaches. Good assistant coaches, who may be very knowledgeable about the game and its technical details, don’t always work well as head coaches. I don’t think anyone can say for sure what qualifications they should look for, but they know one when they see one. The ones they see are the ones that all ready have head coaching jobs – frequently at other Division I schools. In order to entice a successful coach away from another school, one would expect to offer him something more than he has at his current school – usually more money is part of the package. In the business world, the rule of thumb that I remember for the increase that would probably be necessary would be something in the range of a 20-25% increase. If one uses HR practice in structuring job grades salary ranges as a 50% spread from bottom to top, then the 1st move wouldn’t necessarily move that coach’s compensation from reasonable to unreasonable by itself. What happens next however is that college (A) that lost the coach to college (B) will likely raise it salary on the next coach they have to make sure he doesn’t get hired away – and since coach’s compensation usually becomes news – other colleges with successful coaches will probably do likewise. By the time one goes through a few iterations of this, salaries can move significantly higher. A 15%-20% annual increase in salaries will result in salaries being 8-10 times higher in 20 years. I haven’t tried to research data on college coaches, but I wouldn’t be surprised to learn that the increases haven’t been in that magnitude in the last 20 years. Colleges administrators probably justify this because the difference in revenue between very successful programs and even moderately successful programs can be substantial. For example, football bowl payout for major bowls can be a factor of ten (or more) greater than the minor bowls.
What has all this got to do with CEOs? Like college ADs, Corporate boards don’t know what the qualification are for a good CEO, but they know one when they see one. So they tend to hire CEOs away from other companies and the ratcheting up in compensation levels is a result. Keep in mind, that for publically traded companies, more specifics are generally known about total compensation than is generally known about coaches. The top executives compensation must be published annually in detail in proxy packages. So there is no guess-work about what competitive compensation packages are.
In the 50s and 60s we thought we knew what abilities an executive manager needed and we could train people to be good managers even if they didn’t have those skills naturally. But in 70s we decided there were other abilities needed especially for the highest level job. We decided that the necessary leadership skills were different from the management skills that we had identified over the first half of the 20th century. But we’re still trying to understand specifically what those are. This should not be too surprising if one considers that it took about 50 years to develop the body of knowledge on management skills that we were still developing in the 1950s. These leadership skills are also seemingly less tangible and often seem to vary with an individual’s personality than the traditional management skills and functions. The first “poster boy” for leadership in the 1980s was Lee Iacocca at Chrysler. Iacocca became a high-profile, celebrity CEO. How many people have the necessary knowledge on business management and the personality to be a celebrity? Probably not many. And how do we recognize one before he has a chance to do it? Maybe even the people who can don’t know they can until they have a chance to try.
So we have done the same thing with CEOs that we have with football coaches. We hire successful ones away from other company’s with higher compensation. Over time this get ratcheted up the same way that football and basketball coach’s salaries have. Board members no longer relate CEO salaries to the internal salary ladder. They are related to other CEO’s of other company’s. Because that’s what you have to pay to get a proven one from someone else and because if you don’t pay your succesful one that much or more, you may lose him or her to someone else. In this environment and with this paradigm, additional disclosure doesn’t help. In fact, additional disclosure may make the situation worse. Early in my career, I worked for a guy who liked to say, “Money isn’t everything, but it’s how we keep score.” There was a professional baseball player a few years ago who became a free agent, and held out for what appeared to be the highest salary in the game. A reporter asked him if he really needed that much money to play the game? His answer was that he would play the game he loved for much less, but he thought he was the best player in the majors, and if that were the case, the team should be willing to pay him accordingly. After all it was the only way he could validate his claim to be the best. I’ve had people in my organization – not at an executive level – who were perfectly happy with what they were paid until they thought someone might be getting more for the same work. Money may really be how most of us “keep score”. If so additional disclosure may only tell us how much more we need to ask for.
We stockholders now get to vote on executive compensation. Will it that bring it down? I have serious doubts, but only time will tell. So far the public flack seems to have resulted only in longer explanations in proxy statements of why the current levels are justified. These are not irrational explanations, but they are based on a set of assumptions that I believe are flawed. But these are not things that can, at this point in time, be proved or dis-proved with any rigor. But for things to change, I think the underlying paradigms have to change. In the final installment in this series, I will try to spell out what I think needs to happen.