NEW YORK (TheStreet) -- The question of whether a CEO is worth the price a company pays often boils down to measurable factors, like stock price. But that salary might also be worth it for other, less tangible reasons.
Last December, Prof. Sydney Finkelstein of the Tuck School of Business at Dartmouth had the heads of J.C. Penney (JCP), Sears Holdings (SHLD), BlackBerry (BBRY) and Microsoft (MSFT) high up on his annual rating of the "Worst CEOs of 2013." Last week, the employees and customers of Market Basket, a grocery store chain in New England, protested the firing of Arthur T. Demoulas, the former CEO. Other than those holding a short position, it is difficult to imagine anyone working against the replacement of the leaders of Blackberry, Sears Holdings and others on Finkelstein's list.
My article last week on TheStreet detailed the extensive damage overpaid CEOs can cause. This article takes the opposite approach, examining why those like Arthur T. Demoulas deserve every penny of the $10.5 million in average compensation received by the heads of members of the Standard & Poor's 500 Index (SPY).
A CEO like Demoulas who engenders loyalty may well be worth the money providing that dedication results from an outstanding performance as head of the company. Devotion from the employees is significant, but when it comes from all of the stakeholders in a commercial enterprise -- customers, shareholders, lenders, the local community, etc. -- it becomes a surer sign of a company's growth and stability. Under such a leader, workers stay, customers maintain accounts, those who own the stock are in it for the long term, lenders extend preferential conditions on debt matters and community leaders will work with the business to make the local climate conducive to its operations.
No one doubts that Warren Buffett, CEO of Berkshire Hathaway (BRK.A), is such a leader. His magnificent success with his company has resulted in extraordinary success for shareholders and his company has been described as a corporate utopia.
When a CEO fails in that critical loyalty test, it shows up most obviously in high short floats for publicly traded companies with Blackberry (31.79%), J.C.Penney (26.73%) and Sears Holdings (19.91%) -- all several times above the level of 5% that is considered to be troubling for a business.
Reward the Talent
There is a tremendous demand for experienced high level executives from private equity funds and others. A previous piece on TheStreet detailed how these institutional investors will take over companies seeking to sell for a profit at a later date. To do that right requires experienced executives in that industry group. Private equity compensation can many times exceed that of C-level executives at companies. For a business to prosper, it must keep its best and most experienced executives -- and that costs a lot in a competitive marketplace for top talent.