The debt we owe our CEOs

Opinion: America's corporate bosses have won for us one of the highest standards of living in the world. They deserve some credit.

By TheStreet Staff Oct 5, 2011 11:28AM

By Brad Hall, TheStreetTheStreet

 

Last weekend, 700 people were arrested on the Brooklyn Bridge for protesting greedy corporations. Greedy corporations? What does that even mean? It reminds me of graduate school, where my professors would continually warn about the evils of corporate America and preach of the true goodness of all things academic. I used to wonder whether those professors owned the outputs of such evil -- like a bed or a PC.

 

America's standard of living is among the highest in the world. One wonders whether the Brooklyn Bridge leaders understand why they are able to protest in designer jeans and Nikes (NKE). It's because America's CEOs consistently produce big profits. Profits are good.

 

The primary lever for continued profitability is productivity. Every country's standard of living depends on national productivity. Collectively, America's CEOs have created the world's third-most-productive country. America should be proud of its CEOs and grateful for their contributions. Here are four of the most prominent contributions.

 

1. CEOs create jobs, and people with jobs pay taxes. Jobs are created by CEOs who continually take risks, betting that their businesses can sell something for more than its production costs. No risks, no rewards. Sometimes risks succeed; sometimes they fail. But tolerance for errors is particularly low for CEOs. That's why their average tenure is just 4.5 years. Economically, it's a dangerous job.

 

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When CEOs succeed, employment and tax revenues grow -- taxes that are used to keep our streets safe, our borders secure and our national infrastructure operating.

 

Consider General Electric (GE). GE provides jobs to enormous numbers of people. The company directly employs 136,000 Americans and, indirectly, through tens of thousands of suppliers, employs hundreds of thousands of additional workers. GE's supplier companies pay federal, state and local corporate taxes, and so do their employees. But GE's value does not stop there. Consider the local hotels, restaurants and stores near GE offices. Many, many lives depend on the quality of GE CEO Jeffrey Immelt's leadership.

 

2. CEOs increase shareholder value. In order to improve the nation's profits and its standard of living, money must continually move through the economy. A common method for circulating money is for citizens to become part-owners in companies through stock purchases. Every CEO must make his or her company as valuable as possible for its owners.

 

As GE's CEO for 23 years, Jack Welch increased the company's value for its shareholders from $14 billion in 1981 to more than $410 billion by the end of 2004. That's an increase of $396 billion. The year of his retirement, Welch was paid $4 million per year. Worth it?

 

Let's look at the impact of Mark Hurd, the former Hewlett Packard (HPQ) CEO, on HP's shareholder value. In January 2005, Hurd took the reigns from Carly Fiorina. During the four years preceding Hurd, HP sustained a slow loss of value. Over the next five years, Hurd turned it around. For a five-year period, HP shares even outperformed the mighty IBM's. Hurd was fired -- after 5.5 years. Upon his departure, HPs shares began falling, and they are still falling today. Can CEOs truly impact value? Definitely.

 

3. CEOs improve our lives. Think of your world before FedEx (FDX) CEO Fred Smith made it possible to send packages overnight or before IBM (IBM) created automatic teller machines. Think of the impact on your life from Jeffrey Bezos of Amazon (AMZN) or from Sam Walton, who created Wal-Mart (WMT) to "save people money to help them live better." Almost every American lives better, or at least more comfortably, thanks to such innovations. Credit is due to CEOs with ideas, passion and a talent for organizing people to produce great value. If not them, then who?

 

4. What is a CEO worth? Rationally speaking, CEOs are grossly underpaid, given the value they produce. For example, FedEx ships 1.26 billion packages per year. Fred Smith is paid $2.04 million. Thus, Smith's pay increases the cost of a FedEx package by $.0016. Does that seem excessive? Jeffrey Immelt of GE is paid $7.69 million per year, or .0052% of profits. Greedy? Would GE customers be thrilled if they could eliminate Immelt's cost by passing on a discount of five one-thousands of one percent?

The positive impact of a CEO is simply enormous. The cost of a CEO is relatively minuscule. CEOs, on the whole, are underpaid for the value they produce. They live in an unforgiving, high-stress world. They, too, are working men and women.


So why such hatred? It's envy, pure and simple. Ironically, as the Brooklyn Bridge crowd accused corporations of greed -- sin three among the Seven Deadly Sins -- they commit sin seven, envy. He who is without sin, let him cast the first stone.

 

This commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

3Comments
Oct 5, 2011 3:56PM
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You did not mention that it was only a few months ago that GE announced that it would finally stop outsourcing so many jobs over the next few years. The fact they had to make an announcement about it says allot.

When it comes to CEO's, When they aren't making the giant millions because of something they have done or brought on themselves. Instead of cutting themselves back, they cut those jobs you are harping on rather than make a few less million that year. Case in point, BOA is cutting 30,000 jobs. And starting to charge $5.00 a month for debit card usage. All just happens about the same time they just lost a major lawsuit over their mortgages and have more lawsuits pending. We are basically paying for their mistakes. But guess what.. no mention about the CEO taking any kind of cut...And the people that keep high amounts of money in the bank, wont get charged the new fee. Just those who need the money more are going to get charged.

Oct 5, 2011 3:19PM
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1) incoorect - Stee Jobs is not hiring techs to make I-pods out of the goodness of his heart.  He's doing so because a lot of customers asked him to make them an i-pod and he can not single handedly make millions upon millions of the devices himself.  They are the ones demanding the product, thus driving the need for labour, thus creating the jobs.  Steve Jobs may cut the checks, but he wouldn't and couldn't do so without a comsumer base that wanted more from him than he could deliver himself.  CEOs may be facilitators, managers and organizers of jobs, but they don't actually create them.

 

2) short version, most of us that aren't shareholders don't care about shareholder value.  Please quit expecting us to do so.

 

2  - 4) not as correct as you think: a common comment made when the computer crashes is that we should call Bill Gates for tech support.  I always reply, :"why, do you really think the top man in the company did any of the coding, testing, debugging or anything else directly to make the product and if not do you really think he's at fault for the crash and that he could fix it better than a real tech head?"  The same applies to Steve Jobs: how far could he get into making an i-pod from raw materials, and your battery concerns may be in better hands in an electrician, and if a lab tech figures out how to double the storage size, why don't we give him the credit instead?  This isn't universal, but I find we give a lot of overdue credit (blame) to the guy in charge, not the guy doing the work.  Edison said "genius is 1% insperation and 99% persperation", yet we reward the idea man, not the man that brought the idea to fruition.  Or in Randian terms, if you can't make the product you yourself are selling, why do you not think you may be a leach profiting off the work of another?  Back to shareholders, why do people that did not run the company, make the products or otherwise have done any actual work to make the company a success get preferential treatment?

 

For all the multiple visions, that's the mindset behind these protests, we want things back in the hands of the working man, not the idea man or the investing man.  We don't dispute they have value, but without the people that take those ideas and money and actually make them happen, they are nothing, and that we don't relaly appriciate being told how worthless we are to sate the egos of the men and women in charge, and we cretainly aren't going to accept the usual level of "pay no attention to the man behind the curtain" level excuses.  We are the ones that actualy program and improve the software, make and iimprove the i-pods, and get the food from the farm to your table, not them. 

Oct 5, 2011 12:59PM
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Well said - the Politics of Envy has been getting a pass in our country for over 100 years.  Rather than self-righteously pointing out someone else’s flaws (of which there are many), populists need to admit that they are speaking from envy and “take the plank out of their own eye”.

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