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.
There is also the need to keep the best working up the corporate ladder to the corner office.
The median age is 55, with 12.8 years tenure at a company before becoming CEO. Most could have retired or left long ago for other pursuits. What keeps them moving up the chain of command has much to do with the compensation that comes with being a CEO. The pay and other benefits have to be compelling as these are very capable people with a skill set that could go off to teach, consult or kick back and take it easy, among many, many other options.
It takes a driven person to make it to the CEO position and a high level of compensation is what keeps them in top gear for the duration of the journey.
Buffett himself put it best when he commented that, "I always knew I was going to be rich. I don't think I ever doubted it for a minute." Buffett's company is extraordinary in many respects, but it is precisely extraordinary that corporations need in their CEOs. For aspiring leaders motivated, as Buffett clearly was, by pecuniary delights, a high level of compensation is needed to lure and keep them.
If shareholders do not feel that what the CEO makes is justified, they can sell. But when a stellar CEO engenders loyalty due to a superior performance, there are rewards for all.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
Correction: An earlier version of this story misrepresented Tuck School of Business Prof. Sydney Finkelstein's first name.