What Do Terry Semel, Henry Ford, and AIG Have in Common?

By 1916 Henry Ford was a rich man: his company was making $60,000,000 of profit a year (in 1916 dollars!) and he was the dominant shareholder. Rich beyond belief, he made a shocking announcement to Ford’s shareholders – rather than paying out the profit in the form of dividends, he wanted to invest it back in the company to “employ still more men; to spread the benefits of
this industrial system to the greatest possible number, to help them build up their lives and
their homes.”

Minority shareholders were enraged by Ford and sued – alleging that a corporation could not put philanthropy ahead of the interests of the shareholders. The court agreed, stating:

The difference between an incidental humanitarian expenditure of corporate funds for the benefit of the employees, like the building of a hospital for their use and the employment of agencies for the betterment of their condition, and a general purpose and plan to benefit mankind at the expense of others, is obvious. There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his codirectors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. (emphasis added)

Since this court decision, corporations have frequently invoked this argument as justification for activity that might not be entirely good for the world, but is good for the profit of the corporation. Indeed, we’ve become so accustomed to the notion that corporations put profit before public good that its impossible to conceive of a corporate CEO standing up today and telling his shareholders what Ford attempted to do 90 years ago.

And yet, look at what has happened in corporate America, and particularly amongst financial institutions. Corporate executives – and the corporate boards filled with corporate executives from other companies – have somehow convinced themselves that the betterment of executives is above the best interests of the corporations. In other words – the exact opposite scenario described in Ford v. Dodge – but still just as illegal.

The news over the weekend that AIG – despite horrible management and a $170 billion bailout from the US government – is paying out $160 million in bonuses to the very people that brought the company to its knees, is an example of such “in house philanthropy” trumping corporate interests.

AIG’s CEO has given – on its face – a legitimate argument for the bonus payments. CEO Liddy noted:

“AIG’S hands are tied,” Liddy replied. In a letter to Geithner yesterday, Liddy said he found the bonuses “distasteful” but he added, “These are legal, binding obligations” and “we must proceed with them.”

But then, in light of the ruling of Ford v. Dodge, wouldn’t bonus payments that are clearly not tied to the performance of the company and the company’s profits, be on their face invalid. Why is it that corporations can’t choose to donate hundreds of millions of dollars to philanthropy without regard to profit but can do the same when it comes to executive compensation?

Perhaps, however, the real tragedy of the AIG bonus payments has nothing to do with the fact that US taxpayers are paying for these disbursements, or the fact that it seems like a violation of corporate law. Perhaps the real tragedy is what this says about the state of US corporations, and their ability to compete in the global economy. As a friend of mine noted, “the fact that AIG agreed to contracts where they would have to pay out these kind of bonuses in a year the company lost $99 billion ($61.7 billion in Q4 alone) is absurd and highlights the ridiculousness of the typical executive contract structure.”

I noted this a few years ago when Terry Semel, then CEO of Yahoo, received $200 million in stock and salary for one year of work. Aside from the fact that $200 million could enable you to hire 2500 high quality, experienced Internet employees, or buy around 400 million clicks on Google, Terry Semel’s big payout came despite the fact that Yahoo was losing marketshare at a rapid rate to Google, losing top executives, and making poor decisions left and right.

In other words, just like the corporate bigwigs at AIG, Terry Semel’s contract was clearly structured in a “heads on win, tails you lose” way; If Yahoo did well, Terry got rewarded handsomely, but if Yahoo did poorly, he still walked away with millions. Whenever you have a system set up without any regard for performance, you are asking for situations like Yahoo, AIG, Enron, Bear Stearns and all the other countless examples I could list. Here’s a long quote from my original post:

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.

So go ahead, AIG, continue those payouts. Note, however, to the US government – a company that is legally compelled to pay millions to people who have lost billions cannot be saved, no matter how big the bailout. Cut your losses!

 

Two Lessons The Yahoo Board Taught Me: Live for the Future, and You Don’t Get What You Pay For

This week I received my proxy information from Yahoo. The introductory letter accompanying the shareholder material starts out with a bang: “The vote you will cast for directors at Yahoo’s August 1, 2008 annual meeting is the most important for stockholders in our history.” In my head, I imagined a deep male voice reading this statement in a hushed yet dramatic tone, not unlike one of those warnings you hear before an episode of Cops: “The following program contains scenes that may be unsuitable for minors. Parental discretion is advised.”

With that sort of introduction, you immediately know that the Yahoo Board is fighting for its life, and they don’t waste any time identifying the enemy: Carl Icahn’s board removal proposal. The letter suggests that Icahn’s only strategy is to sell to Microsoft and that “given Microsoft’s stated position of not wanting to acquire Yahoo!, the election of Mr. Icahn’s slate could result in substantial erosion of stockholder value.”

Lesson #1: In the Future, Yahoo is Not the Laughing Stock of Silicon Valley

Of course, we all know that Microsoft ‘stated position of not wanting to acquire Yahoo!’ only came into being after the current Yahoo board rejected Microsoft’s offer of $33 a share. And considering the fact that Yahoo is now trading at $22.09 – a drop of over $15 billion in valuation – one could conclude that a warning of a ‘substantial erosion of stockholder value’ from the current board is a bit of pot calling the kettle black.

But OK, that’s stating the obvious. No doubt the brilliant minds at Yahoo who rejected Microsoft did so for good reason. Indeed, they expand upon their rationale as the letter continues. Here’s the highlights:

“We made a deliberate, disciplined decision to make investments that would generate greater long-term value for stockholders.”

“We are well-positioned to capture growth in an online advertising market that is projected to grow from approximately $40 billion in 2007 to approximately $75 billion in 2010.”

“We believe that successfully executing on our strategy of being the “starting point” for the most consumers on the Internet and the “must buy” for advertisers will enable us to generate double-digit growth in operating cash flow . . .”

“We’re continuing to see benefits from last year’s rollout of Panama . . .”

“Our acquisitions . . . have all helped advance our core strategies.”

“We are winning new business partners and expanding relationships with existing partners . . .”

“Soon, we will roll out our new advertising management platform . . .”

As I read through all these reasons to maintain the status-quo at Yahoo, I am reminded of the one-hit wonder from the 80s, Timbuk3. Their one popular song: The Future’s So Bright, I Gotta Wear Shades. On the one hand, I like the ‘glass half full’ optimism espoused by the Yahoo board. But on the other hand (a much bigger and powerful hand), I have to rain on the Yahoo parade here. If all you can talk about is the great future ahead of you – without nary a mention of measurable success today, you are basically admitting failure.

I mean, look at these statements in a little bit more detail. For example, “We are well-positioned to capture growth in an online advertising market that is projected to grow from approximately $40 billion in 2007 to approximately $75 billion in 2010.” In other words, the online advertising market is growing. Great, but what does that have to do with Yahoo’s current strategy? As I have said numerous times, in the online advertising space, growing revenue is not a victory – a rising tide raises all ships. Growing market share, on the other hand, is a sign of success. And as we know, Yahoo has not grown market share in search, email, or display over the last few years.

And what about the ‘benefits’ from the Panama roll-out? Is one of the positive outcomes of the Panama roll-out signing a deal with Google to better monetize your search traffic? One would think that if Panama was really a success, a Google monetization deal – one that Yahoo claims could make up to $400 million in incremental revenue in 12 months – would not be necessary. If you can make almost half a billion dollars in a year by using your competitor’s product, Panama cannot be considered a success.

“We are winning new business partners and expanding relationships with existing partners . . .” And? That’s called running a business – if you weren’t winning new business partners, I would start auctioning off the office furniture.

“Soon, we will roll out our new advertising management platform . . .” Soon I will cure cancer and win the lottery. It’s great to talk about the future, but ‘there’s no tomorrow if you don’t worry about today.’

At the end of the day, I think I can pretty succinctly sum up Yahoo’s argument in two points: 1) OK, we haven’t done anything in the last few years and we are losing market share, but give us a chance, we’ll be doing cool things in the future! 2) Even if you think we suck, Carl Icahn will suck even more, trust us. This is about as weak a two-pronged argument I’ve ever heard. Personally, I plan to attend the August 1 shareholder meeting, and I’ll be bringing the bacteria-free tomatoes.

Lesson #2: Heads We Win, Tails You Lose: A Primer on Executive Compensation

Stockholder proposal #3 – from the United Brotherhood of Carpenters Pension Fund – suggests the following amendment to the Yahoo articles of incorporation:

Resolved: That the shareholders of Yahoo . . . adopt a pay-for-superior performance principle by establishing an executive compensation plan for senior executives that does the following . . . delivers a majority of the Plan’s long-term compensation through performance-vested, not simply time-vested equity awards . . . establishes performance targets . . . relative to the performance of the Company’s peer companies . . . limits payments under the annual and performance-vested long term incentive components . . . when the Company’s performance . . . exceeds peer group media performance.

On its face, it seems like a reasonable request to tie compensation to performance, right? We have all had our annual performance reviews and seen our raises and bonuses rise and fall based on our individual performance and the overall health of the business, so why not apply this principle to the executives at Yahoo – or at any company for that matter?

Well, the Yahoo board has numerous reasons why their executives shouldn’t be treated like us average peons. First, let’s start with Jerry Yang – the man who has successfully continued the downward slide begun by his predecessor, Terry Semel (who, by the way, made over $200 million in one year while he lead Yahoo into the sorry state it is in today). The board has this to say about Jerry Yang:

The proposal fails to take into account the fact that our Chief Executive Officer, Mr. Yang, received a nominal annual salary of only $1 for 2007 . . . did not receive any bonus or other compensation from the Company in 2007, and was not granted any stock options or other long term equity incentive awards . . .

I have two things to say about this argument. First of all, the fact that Yang doesn’t get any payment does not counter the argument that executives should be incentivized to increase company performance. Indeed, getting no payment is probably just as bad as getting a guaranteed huge payment – in both cases, your compensation is not tied to the overall health of the company.

Secondly, Jerry Yang is a billionaire already and to that end, money is not the primary motivation for his work at Yahoo. But beyond Jerry Yang, there are a lot of people at high levels inside Yahoo who are making a ton of money that is clearly not correlated to Yahoo’s declining value and market position. Susan Decker, Yahoo President, received $14.8M in 2007, including a $1.1M bonus. Farzad Nazem’s total compensation went from a mere $12.4M in 2006 to $22.3M in 2007 (though to be fair, he only got a $220K bonus). The lowest paid Yahoo exec was Blake Jorgensen the CFO (ironically), who scraped by with $1.6M in compensation.

Bottom line: arguing that your billionaire CEO doesn’t get paid doesn’t carry any weight against the “pay for performance” argument, especially when he is not incentivized by company success and the other execs are making millions while the company flounders.

Moving on the Yahoo argument #2, the board argues:

This type of benchmarking is inconsistent with the compensation practices followed by the majority of the companies with which Yahoo competes for executive talent. The Board believes that, if the policy as described in the stockholder proposal was adopted, the Company could be placed at a substantial disadvantage in attracting and retaining the most qualified executives.

In other words, corporate executives are in their own self-contained universe and would never accept a job that actually connected their pay to their performance. Sadly, this is no doubt the case for many executives. Then again, do you really want to hire someone to run your company who doesn’t have the confidence in his own abilities to put some skin the game?

And while it may be true that pay for performance is “inconsistent with the compensation practices followed by the majority of the companies with which Yahoo competes”, that doesn’t mean you have to adopt the bad decisions of your competitors. If Southwest Airlines decides to save some money by skipping a few safety checks here and there, does that mean that United should follow suit to compete financially? This sort of circular, weakest-link argument is the kind of group-think that sinks companies.

The Board (sounds like “The Borg”) continues with a financial argument next:

The Board believes requiring performance targets be established relative to peer companies could shift executives’ focus from long-range growth to short-term comparisons and would place Yahoo! at a substantial competitive disadvantage . .. Further the Board believes that Yahoo! should be able to reward its executives for good performance even if its peer companies also do well, particularly since . . . it is difficult to identify a single comparable peer to the Company given the breadth of the Company’s business.

First of all, I don’t care whether you measure against long-term or short-term performance, either way the current executive team is grossly over-compensated. You want to talk about the last eight years of Yahoo’s existence? The rapid loss of search market share, the continuing erosion of email market share, the threat of Google-DoubleClick, the disappointing “Yahoo Entertainment” venture, the growth of Craigslist at the expense ofHotJobs? I’m happy to measure performance by short-term or long-term performance, but clearly “The Board” is doing neither.

As to the argument that “it is difficult to identify a single comparable peer to the Company . . .” Sigh. Do I need to send “The Board” a Google Map with directions from Yahoo in Sunnyvale to Google in Mountain View? Give me a freakin’ break.

And finally, The Board tries to show how equity grants somehow incentivize performance among executives:

In 2007, equity-based awards granted to the Company’s executive officers (other than Mr. Yang who received only his $1 base salary) directly linked approximately 82% to 92% of each executive’s annual direct compensation to the performance of the Company’s stock.

Sounds good on paper, doesn’t it, until you realize that we are talking about the difference between a $15 million annual package versus a $30 million one. In other words, if the Yahoo executives completely drove Yahoo into the ground (which they have basically done), they would still receive millions of dollars. Explain to me how that ties anything to performance.

I recognize, of course, that a lot of this is not specific to Yahoo and that there are plenty of idiotic companies that pay their executives tens of millions of dollars annually regardless of performance. But Yahoo’s problems go far beyond overall American corporate ineptness. We are talking about a company that was once the clear king of the Internet that is now fighting for a spot in the top ten. They’ve anointed the founder as CEO – who has no experience outside of Yahoo, who is filthy rich, and has no financial incentive to improve the company. They talk about the future with no evidence that any current efforts are paying off and lots of evidence to suggest that their core business are under serious attack. And on top of that, they spend millions to ‘retain top executives’ – the very top executives who have let their market share, top employees, and profits disappear.

Carl Icahn may have ‘no plan’ as the Yahoo Board suggests, but at this point I’m willing to accept ‘change for the sake of change.’ Otherwise I fear that in a matter of years I’ll have to add Yahoo to my list of companies like Pan-Am, Sears, and Kmart – companies with seemingly insurmountable leads in their industries that have either already died or will soon disappear.

 

Terry Semel, You Owe 1000 Yahoo Employees $200 Million

The Yahoo pink slips starting flowing yesterday – a rumored 1000 Yahoos cut. I got a text message from one of my friends at Yahoo with the succinct headline “Laid off.”

I’ve been a Yahoo stockholder for some time, and I’m glad to see the stock price rising back into the $30/share range. And I suppose that laying off 1000 people will only further add momentum to Yahoo’s share prices. But as a regular guy who knows regular guys (and gals) who just got laid off by Yahoo, I’m angry.

About two years ago, I wrote a post about then-Yahoo CEO Terry Semel’s outrageous $230 million annual paycheck. I noted that for $230 million, Yahoo could buy a lot things, for example:

• 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!

So now Yahoo has jettisoned 1000 employees. Had Mr. Semel not received that $230 million one year paycheck, those 1000 employees might not be on the street right now. And let’s be clear, the 1000 employees getting the ax this week weren’t the ones making the business decisions that eventually drove Yahoo to the place it is in today. Again, I wrote about this way back in early 2006:

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?

If the buck stops somewhere, it stops with Terry Semel and the other over-paid Yahoo executives. But in the ridiculous corporate world that exists today, Mr. Semel and his cronies reap the rewards and credit when things go well, and don’t feel any pain when things don’t. Indeed, I predicted in 2006:

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.

Well, turns out he didn’t get a severance package, per se, but in the last year of his failed regime, he didn’t do too badly:

Despite Yahoo’s recent struggles, Semel received another big bundle of stock options last year that boosted the value of his 2006 compensation package to $71.7 million. That was more than any other CEO among 386 publicly held companies covered in an Associated Press analysis of executive compensation using new rules dictated by the Securities and Exchange Commission.

Indeed, in total, “The former movie studio executive already has made a fortune since joining Yahoo in May 2001, having realized nearly $450 million in gains by exercising some of the stock options that he received during his tenure.”

$450 million dollars for taking a company from a strong first place to a distant second. And now 1000 good people are going to have trouble paying their mortgages. Terry, I know this might cramp your style a bit, but I think this is a perfect opportunity to give back to Yahoo: specifically, give some of that $450 million to those ex-Yahoos who just got axed.

Will that happen? Of course not. But maybe some people in the corporate world will begin to learn from all of this. After all, the business world doesn’t suffer fools gladly. I’d like to believe that companies that reward poor management with hundreds of millions of dollars will eventually have to pay the piper. Again, my 2006 thoughts:

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.

 

Jerry Yang?

For a long time, I’ve used Jerry Yang and David Filo as the models of smart Internet founders. What impressed me so much about these guys is that they had the confidence to push forward with their idea, despite the many naysayers who said it couldn’t be done. But more importantly, they also had the smarts to know when to let go of the reins. Once Yahoo started to become a “real” company, they took a backseat and let seasoned business leaders take charge

This is really a pretty amazing transition – many entrepreneurs don’t know how to switch from pig-headed visionary to laid-back team player – but Yang and Filo did it and did it well. In many ways, they were the model entrepreneurs that taught Sergei Brin and Larry Page their playbook on going from start-up to mega-corporation.

But now comes the news that Terry Semel is stepping down (or being fired, or both, it doesn’t matter) and Jerry Yang is assuming the position of CEO. Additionally, Susan Decker, the former CFO famous for her quote that Yahoo was essentially battling for second place in search, is now President.

I definitely have some mixed feelings on this move. On the one hand, I think it was long past time for Terry Semel to move on. No doubt he did some great things for Yahoo – in particular the acquisition of Overture, HotJobs, Flickr, and Del.icio.us. But he also presided over Yahoo gradual slide from #1 search engine to #1 outsider looking in. And, throughout it all, collected a lot of money – over $200 million in one year alone.

I do think that Yahoo’s social media strategy will pay dividends in the long-run, but there’s no future if there’s no today, and Yahoo had consistently underwhelmed shareholders, search marketers, and employees. It’s time for a change.

But Jerry Yang as the new head-honcho? This one makes me a little nervous. No doubt Jerry Yang is an incredibly smart guy, he knows Yahoo better than anyone, and he’s a lot more seasoned than he was in the mid-90s when he gave up the reigns to someone else. If nothing else, I’m sure his presence at the top will encourage many smart geeks in the Valley who might have otherwise gone to Google to give Yahoo a second look.

At the same time, however, the guy is 38 years old, he’s only worked at one company – ever, and he has been a senior executive at Yahoo during their losing battle to Google over the last six years. If Yahoo needs some new blood to shake the moss off the log, having the founder return as CEO doesn’t seem to be the right solution.

I would think that there would be plenty of seasoned candidates – perhaps even senior people at Google – who would love the opportunity to come in and take over Yahoo. After all, the stock is pretty low, the expectations are low, and there is a lot of potential going forward (social media, the numerous big companies that want to partner with anyone but Google, the continued strength of online advertising).

Bringing Jerry Yang back seems a bit like the Politburo in the USSR in the 1970s – once the Premier died, they just elected another equally old, equally stodgy replacement who had an equally ineffective and short career at the helm.

I’m hoping I’m wrong here. More competition in the search space is good for everyone. I’d love to see the re-emergence of Yahoo as a major player and innovator. It seems hard to fathom, however, that Jerry Yang is the man to lead Yahoo to the promised land.

 

What Do You Get for $230 Million These Days?

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.