In this, the era of the fallen CEO, compensation arrangements such as Capellas’s are attacked every day. Name the pop business magazine, and there’s sure to have been a recent article on the debacle at XYZ Company when the corporate leader destroyed $100 billion. Or a similar piece about the shareholder value CEO whose underperformance in value terms invited a dozen predators is given a couple million golden handshake for agreeing not to impede a takeover attempt.

In a less dramatic manner but with more value destruction impact overall, journeymen managers promoted beyond their depth to the position of CEO level suddenly appear to often be grossly overpaid.

In buoyant economic markets, such coasters might sustain an illusion of effectiveness as value creators for a while at least. The ultimate measure of value creation Total Shareholder Return (TSR, share price appreciation plus cash dividends) is inflated by a boom market swell that raises ALL companies’ share prices, regardless of quality and performance. 1

But when overall market momentum ships from soaring to trading (which trend sideways and down), the fakery quickly becomes apparent as the valuation-supporting bubble deflates. Suddenly, the difference between value champion and value pretender becomes apparent to all in The City and on Wall Street.

There’s the dilemma, as far as the owners of the company are concerned. A total compensation package of a couple of million or so is a bargain to secure services of a proven Value champion: a Welch, a Gerstner, a Dyson or a Cote (formerly chief executive of TRW, now head of Honeywell). 2 But such outperformers are exceedingly few.

But even half of Cappellas’s proposed compensation package represents mind-boggling overpayment and value destruction when the bet is on journeyman manager who is merely operating the company he inherited from someone else on automatic pilot.

Headhunters and other body-traders tend to be usually skilful in securing the top-end of the compensation range as the standard for all CEOs because it is in their self-interest to do, not because of any alignment of payment to worth.

But just try telling any chief executive, anywhere, that he or she is not deserving of that top compensation tier. One of the personality traits that put them on track to that position was soaring self-belief, deserved or not.

Strong case can be made that the 80/20 rule (some think 95/5) also applies to corporate CEOs.

Most specifically to corporate chief executives. Stated another way, the biz-press has a point when it implies that most chief executives aren’t worth the treasures that they receive in shareholder funds. But the rare, few value champions are worth twice what they are paid.

Capellas, ex-CEO of Compaq and perceived by Wall Street insiders as the key to his former company’s effective integration with its acquirer, Hewlett-Packard, arguably brings strong credentials to being part of that smaller group. Just coincidentally of course, H-P’s share price dropped eleven percent immediately following the announcement of his departure of Capellas from CEO Carly Fiorina’s company.

To ask a bankruptcy judge with an exceedingly narrow scope of responsibility by statute to make judgements about who deserves the top compensation standard and who does not is asking too much.

Cyclical plunge in share prices after March 2000, spectacular corporate frauds in the press plus the emergence of The Fallen CEO as the default topic of business writers in 2001-2 makes it all the more difficult for the rare CEO who is inexpensive at twice the compensation to receive his or her just rewards.

Notes:

1

Because of the distorting effect of general market movement, VBM Consulting contends that the true measure of value creation effectiveness is TSR relative to other companies. Source: The Value Mandate: Maximizing Shareholder Value Across the Corporation by VBMC partners Neill and Clark.

2

Value Mandate, pp. 53-54.
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