The Debt We Owe to Our CEOs

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Last weekend, 700 people were arrested on the Brooklyn Bridge for protesting greedy corporations. Greedy corporations? What does that even mean? It reminds me of graduate school where my professors would continually warn about the evils of corporate America and preach of the true goodness of all things academic. I used to wonder if those professors owned the outputs of such evil -- like a bed or a PC.

America's standard of living is among the highest in the world. One wonders if the Brooklyn Bridge leaders understand why they are able to protest in designer jeans and Nikes. It's because America's CEOs consistently produce big profits. Profits are good.

The primary lever for continued profitability is productivity. Every country's standard of living depends on national productivity. Collectively, America's CEOs have created the world's third most productive country. America should be proud of its CEOs and grateful for their contributions. Here are a few of the most prominent contributions.

CEOs create jobs and people with jobs pay taxes. Jobs are created by CEOs who continually take risks that their business can sell something for more than its production costs. No risks, no rewards. Sometimes risks succeed; sometimes they fail. But tolerance for errors is particularly low for CEOs. This is why their average tenure is just 4.5 years. Economically, it's a dangerous job.
Jeffrey Immelt
General Electric CEO Jeff Immelt

When CEOs succeed, employment and tax revenues grow. Taxes that are used to keep our streets safe, our borders secure and our national infrastructure operating.

Consider General Electric ( GE). GE provides jobs to enormous numbers of people. The company directly employs 136,000 Americans and indirectly, through tens of thousands of suppliers, employs hundreds of thousands of additional workers. GE's supplier companies pay federal, state and local corporate taxes and so do their employees. But GE's value does not stop there. Consider the local hotels, restaurants and stores nearby GE offices throughout America. Many, many lives depend on the quality of Jeffrey Immelt's, GE's CEO's leadership.

CEOs increase shareholder value. In order to improve the nation's profits and its standard of living, money must continually move through the economy. A common method for circulating money is for citizens to become part-owners in companies through stock purchases. Every CEO must make his/her company as valuable as possible for its owners.

As GE's CEO for 23 years, Jack Welch increased the company's value for its shareholders from $14 billion in 1981 to more than $410 billion by the end of 2004. That's an increase of $396 billion (or, for illustration, almost 400,000 million dollars). The year of his retirement, Welch was paid $4 million per year. Worth it?

Or, let's look at the impact of Mark Hurd, former Hewlett Packard ( HP) CEO, on HPs shareholder value. In January of 2005, Hurd took the reigns from Carly Fiorina. During the four years proceeding Hurd HP sustained a slow loss of value. Over the next five years, Hurd turned it around. For a five-year period, HP shares even outperformed the mighty IBM. Hurd was fired -- after 5.5 years. Upon his departure, HPs shares began falling and they are still falling today. Can CEOs truly impact value? Definitely.

CEOs improve our lives. Think of your world before Fred Smith made it possible to send packages overnight or before IBM created Automatic Teller Machines. Think of the impact on your life from Jeffrey Bezos of Amazon.com or from Sam Walton who created WalMart to "Save people money to help them live better." Almost every American lives better, or at least more comfortably, from such innovations. Credit is due to CEOs with ideas, passion and a talent for organizing people to produce great value. If not them then who?

What is a CEO worth?

Rationally speaking, CEOs are grossly underpaid given the value they produce. For example, FedEx ships 1.26 billion packages per year. Fred Smith is paid $2.04M. Thus, Smith's pay increases the cost of a FedEx package by $.0016. Does that seem excessive? Jeffrey Immelt of GE is paid $7.69 million per year or .0052% of profits. Greedy? Would GE customers be thrilled if they could eliminate Immelt's cost by passing on a discount of five one-thousands of one percent?

The positive impact of a CEO is simply enormous. The cost of a CEO is relatively miniscule. CEOs, on the whole, are underpaid for the value they produce. They live in an unforgiving, high stress world. They too, are working men and women. So, why such hatred? It's envy, pure and simple. Ironically, as the Brooklyn Bridge crowd accused corporations of greed -- Sin #3 on the Seven Deadly Sins, they commit Sin #7 -- envy. He who is without sin, let him cast the first stone.


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Hall is managing director of Human Capital Systems (www.humancapitalsystems.com), a firm that designs systems for improving workforce performance. He is also an instructor in Duke Corporate Education's teaching network and author of The New Human Capital Strategy. Hall was formerly a senior vice president at ABN AMRO Bank in Amsterdam and IBM Asia-Pacific's executive in charge of executive leadership and organization effectiveness. During his tenure, IBM was twice ranked No. 1 in the world in Hewitt/Chief Executive magazine's "Top Company for Leaders." Hall completed his Ph.D in industrial-organizational psychology at Tulane University, with a dissertation on people management practices of Japanese corporations.