CEO pay has grown 90X faster than worker pay in recent decades. Prior to 1990, managers were paid mostly in salary and cash bonus. After 1990, corporate America shifted heavily to equity pay (stock options and grants). Why?

• It begins with a Harvard professor in the 70s, who births the idea that “maximizing shareholder value” should be the corporate north star. He suggests management be paid in stock to align incentives with shareholders.
• The shareholder value meme goes viral throughout corporate America in the 1980s and begins resulting in hollywood-sized pay packages—turning faceless company men into celebrities.
• Adjusted for inflation, average CEO pay goes from 1.8 million (USD) in the 1980s to 11.7 million today. A 7X increase. Things really heat up after 1992, see this wikipedia article for a deeper dive.
• The trick of equity pay is that the gravity of the stock market is 9.8% upwards every year. This statistical fact means stock-based pay inevitably grows 3X faster than inflation.

Outside the US, corporate leaders are paid less. In some industries by a factor of 50. In Sweden for example, CEO pay is the 2nd lowest in the developed world. Yet Swedish companies are ranked near the top of global competitiveness and their stocks have outperformed nearly every country in the OECD.

According to this study, no. Dan Rassmusen at Verdad Capital analyzed data on 8,500 executives and found little evidence of “star” CEOs. Unlike in sports, CEO performance is statistically random. The findings:

• Performance of CEOs is not persistent; meaning executives with turnaround success on their resumes don't reliably go on to fix the next companies they lead.
• CEOs with traditionally favored resumes like Ivy League MBAs and management consulting backgrounds do not outperform the average schmuck who rises through the ranks from state school.
• Corporate earnings have not grown faster after the ballooning shift to equity pay…resulting in a loss of shareholder value.
• The scarcity in the CEO talent pool is artificial, the result of irrational human preference and incestuous corporate boards.

It turns out, much of American business media is organized around the "great man" fallacy. As technology allows us to capture more data about our economy, it continues to undermine our narratives. We've joked about this before. Given the data, some future AI might suggest we replace the CEO with a janitor for the cost savings.

Fun fact—there’s actually many stories of Janitors rising to become top executives at their companies! See here, here, and here. Side note: Unfortunately this path up the ladder is now shut. Corporate America now contracts out Janitorial services.

For decades, GE’s Jack Welch was considered the most successful CEO in American history. A cult-of-personality was built up around his supposed management magic. Millions of books were sold. MBA programs were named after him. Due to the enormous equity pay Jack received and GE’s outstanding record, he seemed to prove higher pay does result in higher returns for shareholders:

Under Welch, GE met or beat analyst forecasts in forty-six of forty-eight quarters between 1989 and 2001—a 96 percent hit rate.

Notice the above dates. According to FINRA, the longest bull market in American history was the years between 1987 to 2000.

• Jack Welch perfectly timed his retirement in 2001 and received the largest severance package in history: 417 million dollars. In the years since, time has not been kind to his legacy.
• Welch’s “magic” didn’t create lasting value. He grew GE by pivoting the company from industry to a highly-leveraged financial services business. One that collapsed during the financial crisis, requiring a 140 billion dollar government bailout.
• GE is now a shell of its former self. “The house that jack built,” is valued at just 10% of its former glory. GE Capital, the financial services arm that Jack used as steroids to juice GE's numbers has "zero equity value" today according to Bank of America analysts.

The bottom line: in investing, we've learned that most investment managers are overcharging for beta (the return you get by doing nothing and letting the market take its course)...or getting temporarily lucky while taking on too much leverage (like Welch). What are the chances, once we get more data, that coporate managers end up in the same boat?

🎥 The Defiant Ones- a multi-part documentary originally from HBO on the history of the music business from the 1970s to today through the lens of Jimmy Iovine and Dr. Dre. Netflix

🎥 John Oliver uncovers the private equity-fueled greed turning trailer park dwellers into permanent serfs. Youtube

📄 Want a less dystopian view of AI's possibilities? A positive look at the future of tech with Frank Chen a16z

📄 The rise and fall of an Airbnb empire in NYC New York Times

🔈 Get another take on CEO pay. This NPR planet money episode explains another aspect of the problem, specifically the period from 1992 to 1996 when CEO pay doubled. Planet Money 682

🔈 Step inside the business of Mexican Drug cartels on this chilling Joe Rogan Podcast featuring Ioan Grillo, a journalist who spent 18 years getting up close and personal with violence. JRE #1253