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  • Why High CEO Salaries Are Not the Problem
  • High CEO salaries have been big news. Especially when tough times hit hard, as has been the case in the auto industry, for example, vociferous calls for CEO pay limits abound.

    But, CEO salaries need to be considered much like any key dimension of business decision making. This means it is important to determine what is required to achieve strong corporate results. My 20+ years of research into business success and failure finds that there are definite patterns associated with successful business performance. These patterns repeat so often, that when followed, they generally yield success, and can also help cushion against economic downturn.

    Thus, companies can do quite well by following these patterns and by making "Winning Moves" based upon them. And, whether the CEO has a modest salary or one that seems astronomical, making the right moves is the essential component for corporate success. It is making those right moves, not how much the CEO is paid, that leads to superior business performance.

    We often hear how Wal-Mart's founder and CEO Sam Walton kept his salary relatively modest while his company's fortunes grew. But, under Walton's leadership, success was due to Wal-Mart's making a series of "Winning Moves". Yes, Walton's frugal tendencies may have helped keep him in touch with his market. And, his relatively modest CEO salary may have fit well with and reinforced a more frugal lifestyle. Nonetheless, Wal-Mart's success came from all of the moves that were made. Among them are Wal-Martís intense focus upon discount oriented customers, as well as how Wal-Mart refined its business practices in rural areas away from heavy competition. The right moves, not Walton's salary, are what fueled Wal-Mart's success.

    Furthermore, elsewhere in corporate America, there have been higher paid CEOs with a track record of leading their companies to success. Just like for the more modestly paid Walton, however, under the leadership of these well paid CEOs, success came because of moves made, regardless of their salary.

    And, yes, plenty of poorly performing companies have highly paid CEOs. But, capping CEO pay won't solve the performance problem. Sometimes, the high pay coexists with an environment where pouring big money into business endeavors is thought to bring success. Yet, the spending won't bring the hoped for results--not unless the right moves, that is, moves based upon business success patterns, are made. These companies might be functioning in a lavish spending mode and may be facing the precipice of the kind of decline Jim Collins describes in his newest book, How the Mighty Fall. But, a high CEO salary per se is not the problem. The problem is that the company's spending proclivities seem to dominate while there is failure to identify and make the right strategic moves.

    This hardly means that unlimited CEO pay is always acceptable, since companies must weigh the relevant factors and prudently set CEO pay. It does mean, however, that merely attacking and capping CEO pay, but without adhering to the appropriate business success patterns, will not substantially improve corporate performance. And, in today's environment, where attacking CEO pay seems to have grown fashionable, we are seeing calls for CEO salary caps in corporate situations where the patterns of business success appear to be pretty much ignored.

    Somewhat analogous to the CEO pay issue is the lavish spending on elaborate office buildings. If the firm is overly focused upon spending, while not paying enough attention to making the right strategic moves, elaborate buildings may be a red flag, signaling upcoming decline. But, like high CEO salaries, the lavish building per se is not the problem. The problem is that lavish new edifices are often built when companies are overfocusing upon spending, while not paying attention to their strategic moves. It frequently happens when the company is thriving, but the conditions that let the business do so well are about to shift.

    This does not imply that spending is always bad. In fact, spending that is not excessive and supports strong strategic moves can be quite fruitful. Nor does this disparage those CEOs who help hold down costs by taking an annual salary of only one dollar. But, the key point is that making the right strategic moves that follow the patterns of business success is essential for a company to thrive. No matter what the CEO is paid.

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