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Tuesday, December 04, 2007

oPtion$ Book Club: Steve Jobs and CEO Centrality

Optionsimage Lucian Bebchuk, Martijn Cremers, and Urs Peyer have a new paper out called CEO Centrality.  The paper is based on a series of regression analyses designed to determine the effect of "CEO centrality" on executive compensation and firm value.  The authors define centrality as the CEO' s share of the total compensation given to the top five executives at the company.  The study finds that higher centrality is correlated with a lower firm value (measured by Tobin's Q), lower accounting profitability, worse acquisition decisions, and more "luck-based" compensation.  In other words, CEO centrality is bad.

When I first read about the Bebchuk, Cremers & Peyer paper, I thought immediately of Steve Jobs.  In the colloquial definition of the term, no CEO would seem to have more "centrality" to a company than Jobs.  Jobs is seen as the genius that is Apple, the mesmerizing force behind some of the most successful tech products ever: the Mac, the iPod, the iPhone.

"oPtion$" has a lot of fun poking fun at this image.  For example, there is the extended comparison that FSJ makes between himself, Mozart, and Moses (pp. 35-36): all born with unique talents into the exact right place and time to develop those talents.  I also enjoyed the vignette between Jobs and the iPhone engineers, in which Jobs objects to the design of the phone's circuit board (pp. 50-53).  The engineers point out that the circuit board is laid out for optimum performance, and Jobs clearly doesn't understand how it works.  Nevertheless, he insists on making it "perfectly symmetrical" and ends up firing the head of the project over it.

Like Darian and Michael, I enjoyed the parody but found the Fake Steve Jobs to be a little too incompetent.  After all, the media seems completely on board with the notion that Jobs is a jerk.  But is he a genius?  There seems to be agreement on this as well -- yes.  The Jobs in "oPtion$", however, shows little of these inherent abilities.  Is there something more behind the parody, or is it just fun to pretend he's stupid?  Perhaps these expectations are too high for a light-hearted parody.  But what is Jobs -- a sociopathic genius or a fraudulent poseur?

I focus on this question because I think it goes to the heart of the compensation issue.  What is Steven Jobs worth to Apple?  Is he worth the innovation he brings?  If so, how responsible is he for this innovation?  What slice of the pie is he entitled to?

The easy answer would be -- he's worth what the market will pay him.  But the market isn't some anonymous force, an oracle at Delphi that issues its price pronouncements.  The market is us.  And how does our economy determine what Steven Jobs is worth?  It may be that Jobs is worth the value he has provided for Apple shareholders.  If this is his value, he's undercompensated.  As the fictional chairman of the Board notes in "oPtion$", Apple stock would probably drop 30% if Jobs were no longer CEO.

Steven Jobs is thus the best poster child for high CEO compensation.  He has famously has taken a salary of $1 ever since he returned to Apple.  His apple stock options are by no means on the Ebbers-Kozlowski ends of the spectrum, and most of his fortune is from his ownership of Disney stock.  (His "centrality" index at Apple would, ironically, actually be fairly low.)  And yet perhaps no CEO deserves more.  He's had a huge effect on the stock; check out this chart of Apple share price over the last five years.  Moreover, he truly seems to be the driving force behind the company's products.  He's not just the chief executive officer -- he's the chief creative genius as well.

I'd like to respond to the backdating issue in a separate post.  But I think the notion of CEO compensation -- how it works, what they deserve, what Steve Jobs deserves in particular -- is central to how we come down on the backdating.  I'd be curious to hear what other readers of "oPtion$" think it has to say on the ability-compensation nexus.

Posted by Matt Bodie on December 4, 2007 at 04:12 PM in Books, Corporate, oPtion$ Book Club | Permalink


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It is strange, but it's a sample of one. But he's a talent guy, and in talent industries, like sports and entertainment, compensation is sky high. I guess Bebchuk et al are saying that the talent model is a bad one for most businesses.

Posted by: David | Dec 4, 2007 5:56:33 PM

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