Imagine what your Internet company could do with $230 million dollars. To put it in perspective, you could buy:
- 460,000,000 clicks on Yahoo or Google (assuming an average CPC of $.50);
- 2500 experienced Internet employees;
- A major acquisition (for example, about 1/3 the acquisition price for Shopping.com or LowerMyBills);
- The gross domestic production (GDP) of the Solomon Islands;
- $230 million of additional profit!
Alternatively, if you are Yahoo, you get . . . CEO Terry Semel. That’s right, in 2005 Terry Semel pulled in $230 million in compensation, according to Forbes.
Let’s be clear, since Mr. Semel became CEO in 2002, he’s done some good things for Yahoo. In particular, I have to give him credit for the acquisitions of Overture and HotJobs. He’s also made some potentially interesting “Web 2.0” acquisitions, like Flickr and del.icio.us. And since Terry joined, Yahoo’s stock has gone up more than 400%.
On the other hand, Yahoo’s success has been more than dwarfed by Google, which was basically a cute start-up with minimal revenue streams when Terry Semel took over Yahoo. Today, of course, Google’s market cap is 3X that of Yahoo’s and growing.
And Yahoo has made some other blunders. What’s up with the “media strategy” that has been in the works for a few years now? And despite the decent profit and revenue from Overture, how come the online user interface hasn’t changed in 4 years (in fact, Overture’s name has changed twice now and the UI is almost as slow as it was in the company’s beginning). Yahoo has also lost its relationship with MSN for paid search, and lost the bidding war against Google for AOL.
I often tell people that making money in online marketing these days is pretty easy. As more consumers come online, and shift more of their spending to online activities, the revenue pie is increasing every year. So, if you made $1000 in online revenue last year, it shouldn’t be too difficult to make $1500 this year, depending on your vertical.
The way you should actually measure your online success is not whether you increase revenue or profit dollars, but rather whether you increase your market share of revenue or profit dollars. If you look at Yahoo from this perspective, it’s difficult to call Terry Semel’s tenure an overwhelming success (or maybe even a success at all).
So why does he get paid so much? Well, the standard argument you’ll hear is that he is getting paid “what the market will bear.” In other words, if we don’t pay him $200 million, someone else will. The argument assumes that a company will rise and fall with it’s CEO and thus it is important to keep top management at all costs.
No doubt, a good CEO can have a tremendous impact on a company. But the problem with this argument is that CEO compensation isn’t really tied to results – this isn’t a zero sum game. If Terry Semel drove Yahoo into the ground for a few years, it’s not like his salary would be $25,000. In fact, undoubtedly, his contract has clauses in it that guarantee him big payouts in the event of early termination. So even if he did poorly, he would still likely get a nice windfall.
And, as noted, you could argue that he has in fact done poorly. Yahoo has completely lost the search race to Google, and some of their other properties (like Yahoo Mail, Maps, and Toolbar) are getting serious heat from Google. No matter, in exchange for taking Yahoo from the #1 search property to the #2 property, Yahoo has coughed up an eight figure annual salary.
So the argument that “we are retaining good leadership” is a bit silly really, both because CEO contracts reward CEOs irregardless of performance, and because even subpar performance can still result in huge windfalls.
My thought is that CEO salaries have spiraled out of control because there are no checks and balances to these salaries. CEO salaries are determined by the board of directors of a corporation. The board of directors is usually made up of – surprise, surprise – executives from other companies and former CEOs. All of these people have self-righteous beliefs that CEOs really do deserve millions of dollars of compensation. Plus, the more they can get for one CEO, the more they can demand of their own board of directors.
It reminds me of the golden rule from George Orwell’s Animal Farm. When the animals initially took over, they wrote “All animals are created equal” on the side of the barn. Toward the end of the book, when the pigs had created a dictatorship and enslaved the rest of the animals, the sign was modified: “All animals are created equal, but some animals are created more equal than others.”
So will CEO compensation growth ever end? Ultimately, I think it will. If you continue to have companies paying their top brass $230 million a year, eventually this will create an opportunity for leaner companies without such insane fixed costs to undercut the bloated bigger companies. As noted at the beginning of this post, $230 million buys a lot of clicks, employees, acquisitions, or pure profit. That’s a nice competitive advantage.
When historians examine the rise and fall of the Roman Empire, they suggest that during the rise, the Romans conquered foreign lands but always made sure to provide something in return to the local citizens (roads, aqueducts, engineering, protection). Over time, however, as Rome became bloated, the Romans neglected this golden rule. Instead, they began to heavily tax their provinces, using this money to pay for massive palaces and statues in Rome instead of roads in Jerusalem. The Senate and the Caesars lived lives of luxury, but their decadence resulted in the destruction of the entire system.
American companies can do what they want, but ultimately a system that gives decadent rewards to a select few without tying this compensation to performance is just a drag on the system. Smart companies will eventually figure this out.
A final note: I have to admit that I really being sort of unfair to Terry Semel. In truth, his salary isn’t all that unusual for the CEO of top company. The retiring CEO of Exxon was awarded a $6.5 million annual retirement benefit (0r a lump sum of $81 million, his choice). In general, CEO salaries have increased from 41 times the average worker salary in 1960 to 301 times in 2003. As this is a blog about online marketing, however, I needed to use an example from an online marketing company, and Yahoo was truly an outstanding example.
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