The average CEO makes over 280 times what their company’s line worker earns. This is more than 10 times the ratio observed in the 1970s. Looking just at the salaries and bonuses of Fortune 500 CEOs, financial executives, top university presidents, and even some directors of the larger non-profit organizations, you would think that these leaders are performing at high levels—at least levels high enough to justify their huge compensation. Unfortunately, that’s not often the case.
Many executives are paid huge salaries and severance compensation even when their performance is dismal (and brief). About half of these leaders will be out of the job in less than three years. So, if we are not rewarding leaders for their performance, what are we rewarding them for? They often receive their enormous compensation merely because they made it to the top. CEO salaries have been on a meteoric rise for decades, and they are often independent of the leaders’ or the companies’ performance. What are the reasons for this out-of-whack top-leader compensation?
Glorification of the CEO
From Elon Musk to Jeff Bezos, and historically, Steve Jobs and Jack Welch, CEOs of large firms have become celebrities. We traditionally put leaders on a pedestal, and we suffer from what leadership scholar Jim Meindl called “The Romance of Leadership.” Just like all celebrities, there is a belief that they are so rare that they deserve their high compensation.
Fundamental Attribution Error
Because our eyes are on the leader, we over-attribute success to them—believing that the leader is somehow at the top pulling strings that make it all happen. But in today’s complex and “flatter” organizations, the reality is that it takes a host of workers throughout the organization to make things work. Companies can succeed (or fail) in spite of the leader.
Poor Assessment of Leader Performance
How do we measure leader performance? All too often, it’s all about the money. If the company is profitable, or the stock price is up, we assume the leader is doing a good job. But money, or profit, is only one way to look at performance. Profit is typically thought of as “the bottom line,” but it is only one part of a leader’s (or an organization’s) success.
Leaders Need to Care About People
Another “bottom line” is the people in the organization—the employees, who do the work that makes profit happen. All too often, executives can lead an organization or unit to high levels of profitability, but at the expense of the employees. Many who have led companies to financial success have been dismal failures when it comes to the second bottom line of “people.” The employees are miserable, they leave as soon as they have the opportunity, and, driven toward profit, they care little about quality or about the organization.
What About the Greater Good?
Finally, and often neglected, is the third bottom line: the “planet,” which actually represents the organization’s impact on society. In a world of global warming and other environmental degradation, dwindling resources, growing disparity between the haves and have-nots, it is critical that we measure a leader’s (and the organization’s) value and benefit to society. Does the organization do its work without harming the planet? Does it benefit mankind?
So, a simple rule of thumb when evaluating leaders should be to consider the “triple bottom line”: profit, people, planet. Leaders are only effective when they help lead an organization to financial success, while benefiting employees and society.