Monday, July 16, 2012

Marissa Mayer: Why CEOs make so much money

Yahoo just appointed Marissa Mayer CEO. While it hasn't been publicly announced, she's certainly being paid an enormous amount of money. She'd have to be: she's walking away from a ton of solid options in Google stock in exchange for options in risky Yahoo stock.

Earlier this year, there was a controversy surrounding Scott Thompson, who was CEO for only 4 months, for which he earned $7 million -- and that's without a severance package. The prior CEO, Carol Bartz, won an award in 2010 for "Most Overpaid CEO" for receiving $47-million in compensation; she was fired a year later.

While the amount CEOs get paid is a such a huge controversy, there is good reason for this.
A recent Wired article included Yahoo along with other failing companies like Nokia and RIMM as companies that will probably fail, but if they manage to turn around, could net you a lot of money. Whether the turn around is possible comes down to a single person: the CEO. Microsoft and Apple owe their successes to a powerful CEO. For Yahoo to halt it's death spiral, it'll require a similarly powerful CEO.

From that perspective, CEOs are underpaid. No matter how many billions of dollars Steve Jobs earned from Apple, he was still paid less than the value he brought to the company. Assuming Mayer can turn around Yahoo, a $100 million a year is still small.

There is good reason to believe she can turn around Yahoo: she's a techy rather than a bean-counter. Most CEOs do not have a clue as to what their companies really do. They know how to make the company run efficiently, and they know how to hire solid talent (who then, presumably, know what the company does), but they themselves aren't necessarily the driving force. That's why Google put Eric Schmidt as CEO in the early days: it needed solid bean counting while the founders focused on innovation. That's similarly why recently Google got rid of Schmidt and put a founder back in as CEO: the founders now understand bean
counting, and now want to put the focus back on innovation.

Yahoo is in the same place. It's got all the bean counting worked out, it now needs somebody who knows that the company does, and who can drive it.

Take Yahoo mail as an example. I've used it for 15 years ( It used to rock, but now it sucks relative to Gmail. It would take only a little leadership to make it stop sucking. Marissa Mayer is now going to have to use Yahoo mail as her primary email account ("dog fooding"), is going to notice how much it sucks, and is going to put somebody in charge who can un-suckify it. That's because she's a techy who can recognize it sucks, rather than a bean-counter who could not. The same applies to the other Yahoo properties.

That's why Yahoo paid Carol Bartz and Scott Thompson so much money: it was a bet that they could be such a power CEO. They bet wrong, of course, but that's only obvious in hindsight. Mayer could be a wrong choice too, the stock might drop in half, and she might be fired in a few months. If so, like the prior two CEOs, she'll still walk away with millions. It's because that's what Yahoo had to guarantee Mayer in order to get her away from Google. We'd like to think that CEO's should only be paid if they make the stock go up, but that's not an option, because otherwise, they would never be able to pull competent CEO's away from their previous jobs.

So there you have it. By one accounting, she's way overpaid, and will earn millions even if she screws up. But when you consider how much Yahoo had to guarantee her to lure her away from Google, and how much difference she can have on the company, it's really a small amount.
Update: Mayer just announced she was pregnant. Another reason CEOs make a lot of money: they don't get maternity leave (or sick leave or vacation).


Anders said...

It's a bit unfair calling Eric Schmidt a bean counter and Marissa Mayer a techie. Sure, she has a M.S. in CS, but he has a M.S. in EE and a PhD in EECS. Both has had manager jobs in the last years.

And as for Steve Jobs being underpaid because he was paid less than the value he brought to Apple, all companies are worth the sum of the value the employees bring to the company. If everyone where paid the value they bring there would be nothing left for the company/shareholders.

Unknown said...

I saw the headline and was all Wha??!! Then I realized this is not the same Marissa I was thinking of. I think Errata's Marissa would be a better choice.

Robert Graham said...

Give our Marissa a few more years, and she'll have her turn taking over Silicon Valley.

FreedomFiles.Info said...

Getting less than a tenth of a percent of a firm's net profits when that same CEO has hundreds of times more influence on those profits makes sense.

In the case of Jack Welch, he recieved only seven-hundredths of a percent of the profits GE recieved when he was their CEO:

485 billion in total growth, and during that time period he recieved only a few hundred millions.

It could be argued that CEO's are underpaid by the firms that profit from their management - not the other way around.