Boards of directors are scared of getting it wrong, and they memorialize that fear in contracts that throw tremendous amounts of money at their preferred candidate, often making guarantees regardless of performance.
But it’s not like boards have a spectacular record on picking CEOs in general. Well-regarded people blow it as CEO every year, but they still get tons of money. Why? Because of this deep belief that “CEO-quality” people are extremely rare, so every plausible candidate is incredibly precious.
To be fair, business boards are not unique in this failing. Professional sports teams fall into the same trap all the time.
What I take issue with is the idea that companies and boards are making irrational, or economically illiterate, decisions by paying CEO this amount. I just don’t think that argument stacks up.
As you say yourself boards don’t tend to be very good at picking executives, and may of them are probably aware of that. So why rock the boat when you’ve got a CEO who’s performing.
If you want to talk about the social consequences of CEO pay, that’s a different story. I would be quite happy to support the idea of CEO pay caps linked the lowest paid employee (I leave the question of what qualifies as an employee as an exercise for the reader). But I think that’s a very different argument to an economic argument.
Definitely happened for HP when they took on Leo
The risk of getting that wrong and accidentally destroying billions of dollars of shareholder value (don’t like the term, but it seems appropriate here) is very high (low likelihood, extremely high severity).
As a board member, why would you take that risk, when not taking the risk is so cheap? Ultimately I don’t think the risk weighted expected return on finding a cheaper CEO is greater than just paying Tim whatever number he pulls out of his arse. I suspect expected return is actually substantially lower (probably very negative) than what Tim gets paid.