The A-Rod’ing of Executive Pay

Bundle of Money

Today’s Wall Street Journal observes “Limits on Executive Pay: Easy to Set, Hard to Keep”. It is just one more sign that as long as executives are rewarded for the wrong things, their pay will continue to spiral out of control. It’s the “A-Rod’ing” of executive compensation.

In case you don’t know who “A-Rod” is, he is Alex Rodriguez, the highest paid player in baseball. A-Rod was the mercurial former star of the Seattle Mariners where he was the youngest player to achieve greatness. I watched him excel before his 18th birthday, with dazzling defense on the diamond, wonderful prowess at the plate, and the three C’s: charm, class, and charisma. He was, in short, a delight.

The Mariners nurtured A-Rod until he became a free agent and his agent, Scott Boros, threw chum in the water and attracted all the usual sharks to the feeding frenzy. After an exceptionally vigorous bidding battle, the Texas Rangers (of all people) outbid the big boys — notably George Steinbrenner and the New York Yankees — to land Alex with a breathtaking contract worth $25 million a year for 10 years, and a huge signing bonus. So large was the package that it remains unmatched even today, many years later.

It takes a bit more than one superstar to make a team.

I’m betting, even if you aren’t a follower of baseball, you can guess the rest of the story. As I noted in this post about teamwork, it takes a bit more than one superstar to make a team. So things just didn’t work out for A-Rod with the Rangers. It turns out that casually discarding your journeyman shortstop to bring in a single over-priced superstar wasn’t popular with the rest of the team. It didn’t help that he was paid more than 10 times any other player on the team, sucking up something like 60% of the payroll. I bet the snickers in the dugout after each strikeout still reverberate in his head.

And A-Rod wasn’t happy either. He’s a fierce competitor and losing just rubbed him raw. And it turns out playing outside in Texas in the summer is hot — who would’ve guessed that? So he begged to be traded.

NY Yankees Logo

Here too, I’m sure you can predict the rest of the story. The only team with the revenue or chutzpah to be able to pick up his contract was the New York Yankees. So A-Rod joined the Yankees, a team filled with over-priced talent. A-Rod was right at home with his fellow multi-millionaires.

But alas, the New York crowds are brutal, and they love to chew up and spit out people who don’t live up the the hype. Even while performing well, A-Rod seems miserable. And the Yankees certainly are, having been summarily dismissed from the playoffs more times lately than suits Mr. Steinbrenner.

Translating this to the executive pay world, the same is true. Having the CEO or top executives quite publicly paid exorbitant sums makes everyone sick — from the stockholders to the employees. It just doesn’t make logical sense that anyone is worth that kind of money. And just like in the world of baseball, it makes even the mediocre players demand silly pay packages, spiraling the whole thing out of control.

Relying on superstars alone to build a winning team doesn’t work

The moral here is clear: relying on superstars alone to build a winning team doesn’t work, and rewarding people like it does just makes it worse. Everyone needs a compensation plan that doesn’t reward them for greatness, but rewards them as part of a great team. There should be little individual gain that is not backed up by outstanding teamwork.

No, I don’t think socialism (everyone gets paid the same) works. First, people are individuals, and deserve to be treated as such. Pay packages that don’t recognize this are doomed to failure.

And yes, (as I’ll note in another article) I fanatically believe that great performers aren’t just better than average, but as much as 10 times better. So there needs to be some significant commensurate compensation difference as well.

But when companies start abandoning reasonable rules like limiting executive pay to 10 (or 12 or…) times that of the average worker, things are getting out of control. You have to believe that in setting it to 19x at Whole Foods there was someone who had some kind of internal alarm go off that said “no, we can’t set it to 20, that would be laughable”. I mean after all, can you really look anyone straight in the face and say that Jim is worth 20 times what John is?

News Flash: People work for things other than money.

Companies cry “but we can’t get the talent” or “our managers are being poached by other firms”. They fail to understand the basic fundamental rule of compensation that it’s not all about the money. News Flash: People work for things other than money. Like a challenge, or respect, or a great work environment, or a great team, or … fun.

Smart companies need to realize that when the new CEO candidate demands an absurd pay package, perhaps this isn’t the right candidate. No matter what excuses about “what the market will bear” exists, maybe it’s more about what the team will bear. And perhaps the better choice is to go for the best team builder, not the best negotiator.

And today’s WSJ also has a great article with tips for boards on conquering the problem of executive pay. Not coincidentally, they bring up many of the same points.