CEOs, Like Athletes, Compensated For Their Successful Performances
I am by no means a sports fanatic, but there are times I wish that typical business stories would be more like sports stories. Not necessarily in the issues they cover, but in their approach to covering their topics.
Take the contrast in coverage of the hiring of two well-known guys in the business and sports worlds: executive Robert Nardelli at Chrysler and soccer star David Beckham with the Los Angeles Galaxy.
Nardelli's hiring this week as Chrysler's chairman and CEO was largely panned, while coverage of the soccer team's acquiring of Beckham has been largely laudatory.
Yet if the business pages were to include a career stats box, as the sports pages routinely do, readers would discover that Nardelli and Beckham actually have common traits other than being extremely well-paid.
This would also explode the myth spread by politicians and others critical of executive pay that athletes get “paid on performance” and CEOs don't.
Business reporters scratched their heads about the hiring of Nardelli by Chrysler, which is now operating as a unit of the private equity firm Cerberus Capital Management LP.
“Stunning” was a frequent term used in stories. “Why Nardelli? Why now?” one newspaper headline asked. The articles noted Nardelli's disappointing tenure at Home Depot, where, although earnings did double, he resigned after the company's stock price lagged and he frequently quarreled with shareholders.
Yet sportswriters find nothing “stunning” about the Galaxy hiring Beckham, despite his disappointing performance at his last job. While playing for Spain's Real Madrid soccer team from 2003 to 2007, Beckham was frequently sidelined by injuries, and the team didn't finish its seasons as well as expected.
But soccer writers understand that the Galaxy's owners are betting he can still repeat some of the feats he accomplished previously when he helped make Manchester United a legendary team.
Similarly, Cerberus is taking a chance that Nardelli will be capable of repeating at Chrysler the highlights of his career before his last job.
If business stories came with career stats boxes, they would have to note what is frequently omitted in recent coverage of Nardelli: Before his tenure at Home Depot, he was a key player on a team that would have won the World Cup of company turnarounds.
This would be the reorganization of General Electric led by then-CEO Jack Welch.
After starting at GE as an entry-level engineer in 1971, Nardelli rose to become senior vice president of the company, as well as president and CEO of GE Power Systems, during Welch's reign in the 1990s. The team increased GE's market value by more than $400 billion.
As one of GE's top four executives, Nardelli was a major part of this turnaround, making him a sought-after player for numerous firms. As business columnist Allan Sloan noted in Newsweek, when Home Depot hired Nardelli in 2000 he “was considered one of the two hottest CEO prospects in the country.”
Regular reading of the sports pages would also help business observers see that, despite what CEO pay critics say, neither top athletes nor executives get paid purely on performance.
Much was made about Nardelli's departure from Home Depot with a severance package of unvested benefits and salary for the years left on his contract that was valued at $210 million.
But Sports Illustrated reports that the Galaxy will still owe Beckham a large chunk of the sum promised in his five-year contract, valued at $250 million, even if he “turns out to be a total bust.”
CEOs, athletes, actors and other superstars of their fields do get some incentives for their current performance.
Because of their bargaining power, they also are offered pay arrangements largely based on past performance. As with buying a stock, the past doesn't tell the future.
That being said, many observers think Nardelli's future at Chrysler will be bright. Former GE boss Welch, using another sports analogy, told Business Week that “Cerberus hit a home run.”
Partly, this positive outlook for Nardelli is due to Chrysler being a manufacturing firm like GE, where Nardelli thrived. Also in play is that Nardelli is now in the new league of private equity.
During Nardelli's tenure at Home Depot, the U.S. government imposed on public companies the costly Sarbanes-Oxley rules in response to corporate scandals.
The costs far outweighed the benefits for shareholders as CEOs had to become technicians making sure every i was dotted and had less freedom to be visionaries growing their companies.
Nardelli also had to deal with the growing power of so-called shareholder advocates with narrow agendas who bashed Home Depot for things like allegedly ignoring the plight of the rain forests.
Without these mandates and demands, Nardelli will have the freedom to run Chrysler like he and Welch ran GE in the 1990s. No one knows whether he will succeed, but it is likely that the next Jack Welch will not be the CEO of a company that's publicly traded.
So rather than harping on the new club of private equity, it's time for the real investor advocates to call for easing the burdensome rules imposed on the “old league.”
Then both common shareholders and private equity investors can be on the winning team.