CEOs, says Robert Heller, should be judged by the gap between what they inherit and what they bequeath, though most prefer their rewards in the here and now.
Heinz CEO Tony O'Reilly can't have been thrilled by the headline news, 'Heinz surges as O'Reilly quits'. After multiplying Heinz's market value 21 times in 18 years, he had apparently earned his enormous rewards (total remuneration of $372 million in the past decade alone). Why the surge?
One reason is that, judged by stock-market and competitive performance, O'Reilly's best years were well behind him. His replacement, William Johnson, is expected to act like a good new broom and sweep clean. The judgments on both men, though, could be at fault. No CEO functions in a vacuum.
Factors beyond their control shape much of the outcome.
CEOs inherit the corporation's visible and invisible assets, especially, in a FMCG company like Heinz, its brands. In any company, the people and the traditions are also powerful forces. By just 'being there', CEOs get a flying start towards O'Reilly-sized fortunes. That's doubly or trebly true when all corporate valuations are shifting dramatically upwards.
In the decade from 1986, Heinz's earnings per share rose by a respectable 9.1%: its total return to shareholders soared 49% faster. That striking discrepancy accounts for many of the Heinz billions added during those years. When corporate valuations are spiralling upwards, similar gaps between performance and price abound among large, institutionally-backed companies. But that isn't something for which any individual CEO can take credit.
The truly creditable, or discreditable, gap lies between the CEO's inheritance and the one he or she bequeaths. The real value of the latter, however, won't be apparent for some time after departure. Ian Strachan, currently embattled at the head of BTR, did not create his sprawling conglomerate, with its host of underperforming businesses. That fate was implicit in the group's very creation.
BTR rose to great eminence and universal admiration by combining adroit acquisitions on a global basis with a tight focus on operational improvements and raising profits. The potential drawback was that larger and larger (and dearer) buys were needed to achieve significant non-organic growth. Also, organic expansion over so many entities was likely to meet diminishing returns. Even half-a-dozen clones of Sir Owen Green, BTR's highly accomplished architect, would have found his act impossible to follow.
Strachan needs a far stronger strategy than massive disposals to escape his critics. However, despite five profit warnings in three years, the group has not reached crisis point. While BTR continues to make profits, the need for major corporate surgery is averted. One person can make a vast difference, even in a huge organisation. But without the smell of burning in their nostrils, CEOs rarely prove that truth.
Where would Intel be without Andy Grove, or Compaq without Eckhard Pfeiffer, is an interesting question. Both men surmounted crises in stunning style through individual efforts that make a case for their gigantic rewards.
But in 1996 Pfeiffer's total take was half O'Reilly's. And it's unlikely that, under any CEO's aegis, Heinz would be missing from the food industry's top 10 players.
Nor, for that matter, did GE need Jack Welch to figure among the Big Six of all US corporations. As it happens, both men feature in a roll of no honour: Business Week's five bosses 'who gave shareholders the least for their pay' in 1994-96. The pair share this odium even though in 1996 Welch (like Pfeiffer ) took home under half of O'Reilly's $64.2 million.
GE has a tradition of long-serving CEOs whose successors immediately set out to reform the corporation. Given that each CEO took GE onwards and upwards, all can claim to have passed the inheritance test. Not for them the gibe that the evil that CEOs do lives after them, while the good is oft interred in their bank accounts.
In general, though, top managers have little incentive to look towards post-retirement horizons. They gather their rewards in the here and now.
Shares and options may be devalued by an underperforming successor, but this so-called 'long-term compensation' can be cashed in long before the crunch. Boards are far more eager to reward the boss in the present than to insist on truly long-term payoffs.
That would entail imposing stiff multi-dimensional targets, set for rolling five-year periods, and based on outperforming the competition. Everybody can't outperform: the inevitable under-performers would suffer negative bonuses (ie pay cuts) if targets were missed. As for bonuses earned by exceeding targets, half would be deferred - to insure against the negatives and give the CEO a keen personal interest in longer-term outcomes.
Just 'being there', under those conditions, would not earn multi-millions for hired hands. But as for the chances of any CEOs, even with less matey boards than O'Reilly's, being offered these terms, still less accepting them - don't hold your breath.