CEOs and Quarterbacks: The Mistaken Analogy

The WSJ recently carried a guest editorial titled "Misquided Political Attacks on CEO Pay."  The subtitle contended that the "best analogy" for CEO Comp is pro-quarterbacks. Why? "Not all become stars, but all are well paid in the hopes they will."  The editorial actually had little to say about quarterbacks (one reference to Russell Wilson who "will soon receive a package reportedly worth $20 million or more", a pittance compared to the highest paid CEOs), suggesting that the title was an invention of the editors.

In fact, the editorial was little more than a call to align CEO pay with performance, something that shareholders have long sought.  Id.  ("If chief executives were paid mostly in company stock, and comparatively little in annual salary, then the interests of the CEO, the shareholder and the worker will be much better aligned.").  

But the quarterback analogy still warrants a comment.  Quarterbacks negotiate for their salary against owners who have every incentive to pay the lowest amount possible.  Moreover, alternatives exist, something that likely keeps downward pressure on compensation.  Thus, the amounts are a product of third party negotiations.

CEOs, however, do not negotiate with the owners. They negotiate with a board consisting of directors who they have often helped select. See The Demythification of the Board of Directors.  The final dollar amount awarded in compensation is not, therefore, invariably the product of third party negotiations.  What difference does it make? Quarterbacks are subject to the market and get what they deserve. CEOs are not.    

J Robert Brown Jr.