Jason Jennings is here to tell the world that CEOs don't really get paid all that much. Well, some CEOs, that is. In his new book, Hit the Ground Running: A Manual for New Leaders (Portfolio, 2009), Jenning shares the results of his quest to find leaders who have created disproportionately high shareholder value in relation to the amount of compensation they receive.
"I believe share price is the best barometer of how a company is doing," says Jennings, who co-wrote The New York Times best-seller It's Not the Big That Eat the Small—It's the Fast That Eat the Slow (Collins Business, 2002). "Our compensation system should be based on the value you create."
After studying the performance of 3,600 new chief executives, Jennings chose the 10 who gave the most bang for their companies' bucks and included them in his book. Among them are Patrick Hassey of Allegheny Technologies; Marshall Larsen of Goodrich Corp. (GR); Frederick Eppinger Jr. of the Hanover Group (THG); Ronald Sargent of Staples (SPLS); and Tim and Richard Smucker, who share the CEO position at J.M. Smucker.
Jennings recently spoke with BusinessWeek's Rebecca Reisner and shared his thoughts and discoveries regarding CEO compensation. Edited excerpts of their conversation follow.
You chose to write only about "new" CEOs, those who took office after 2000. Why?
I wasn't interested in stories from the last century. I don't have time for dinosaurs. I believe the world changed in 2001 with the passage of Sarbanes-Oxley, which was a result of the dot-com crash. Before SOX, it was hard to evaluate one company's worth compared to others'. Some of the numbers corporations used were just fairy tales. Now you can accurately determine CEO performance compared to stock performance.
How can you be sure these CEOs can take credit for rising share prices? Market conditions could play a big role.
A rising tide does tend to lift all boats, true. From 2000 to 2008 some bad companies probably had stock that expanded. But you have to look at the companies these 10 CEOs inherited. Hanover Group could have been shuttered by the time Fred Eppinger took over. He saved the company 3,000 to 4,000 jobs. Staples had its lowest share price ever when Ronald Sargent became CEO. These CEOs turned things around.
What kind of compensation are the 10 chosen CEOs receiving?
Most were around $3 million to $4 million. The high was Ron Sargent at Staples with $30 million.
How can these figures be considered low, especially when you compare them to the five-figure salaries most workers receive?
Easy. If you go into a store like Staples or Sam Goody, the average worker will generate around $250,000 in sales per year. It costs the company about 30% ($75,000) of that to employ the worker when you figure in annual salary, insurance, and other benefits and costs. Now when Ron Sargent took the CEO spot at Staples, he expanded revenue from $10 billion a year to $30 billion. So if he gets compensation of $30 million a year, that's only one tenth of 1% of the revenue he helps bring in for the company. Remember, Ron is the steward for everyone associated with Staples stores—the shareholders, the salespeople, the managers, the customers. Meanwhile, if we used that one tenth of 1% formula for the sales associates who generate $250,000 in sales a year, their compensation would be $250 a year.
Are there any commonalities in the way the compensation committees at the 10 companies determined how much they would pay their CEOs?
Yes. They all consider long-term value as part of the basis for CEO pay. They'll look at what the CEO has done in the last three years and what its value is before arriving at a compensation figure.
Were you particularly surprised about any of these CEOs' compensation?
Tim and Richard Smucker. These jellies and jams have been around for 100 years—it's a publicly traded company, though most of the stock is family owned—but they just became the CEOs. They upped sales from $500 million a year to $5 billion over the last eight years. Yet they receive modest salaries, about $3 million each. These are humble men who are not just in their jobs for the money.
Did any of the CEOs surprise you?
Ron Sargent is a tough guy, but he cried during our interview. He said, "We have 85,000 employees. Do you know how many houses we need to buy? How many kids we need to get through college? And that's my responsibility."