CEOs: What do they do?

What do CEOs really do, and why do they get paid so much? Have you ever wondered why some CEOs earn astronomical salaries while their companies underperform? Is Elon Musk truly a good CEO, or is there more beneath the surface? And why are so many guys “starting their own business” and calling themselves the CEO? You’re the boss of nothing.

Chief Executive Officers (CEOs) are often seen as the face of their companies, commanding vast resources and making decisions that shape industries and economies. They are hailed as visionaries when times are good and scrutinized when things go awry. But beyond the public personas and media spotlight, what does a CEO actually do? And does higher compensation correlate with better company performance?

The role of a CEO is multifaceted, encompassing strategic planning, operational management, and stakeholder engagement. At the heart of their responsibilities is setting the long-term vision and goals of the company. They define the organization’s direction by crafting a clear vision that guides its strategies and operations. For instance, Jeff Bezos’s focus on customer obsession and long-term thinking propelled Amazon from an online bookstore to a global e-commerce and cloud computing giant. Similarly, CEOs drive innovation by fostering a culture that encourages new ideas, as seen with Satya Nadella’s leadership at Microsoft, which revitalized the company through an emphasis on cloud computing and artificial intelligence. But they’re not really doing any of the work or research, so it sounds more like they’re just the boss of taking credit for things.

Decision-making is another critical aspect of a CEO’s role. They make pivotal corporate decisions about mergers, acquisitions, or entering new markets. The acquisition of Instagram and WhatsApp under Mark Zuckerberg’s leadership significantly expanded Facebook’s (now Meta Platforms) ecosystem. CEOs determine where to invest time, capital, and human resources to maximize returns, knowing that effective allocation can lead to sustainable growth, while poor choices can be costly.

Building and leading teams is essential for a CEO. They must assemble a strong leadership team and foster a productive company culture. This involves talent acquisition and development, such as hiring top executives and nurturing talent within the organization. Indra Nooyi, as CEO of PepsiCo, emphasized diversity and inclusion, strengthening the company’s leadership pipeline. Motivating employees is also crucial; CEOs like Richard Branson of Virgin Group are known for their employee-centric approaches, creating environments where staff are engaged and aligned with the company’s mission.

CEOs are ultimately accountable for the company’s financial health. They ensure profitability and growth by meeting financial targets and delivering shareholder value. Overseeing budgets to align with strategic goals and implementing cost-saving measures when necessary are part of their financial oversight. Upholding ethical standards and compliance is also critical. CEOs ensure regulatory compliance by adhering to laws and regulations, thereby avoiding legal pitfalls. They identify potential risks and implement strategies to mitigate them, addressing issues like cybersecurity threats, market risks, and reputational damage. A CEO seems to be the guy making the choices. Nobody wants to make a choice anymore because nobody wants to be responsible for it. The CEO is the guy making the choice to do this rather than that—and being blamed for it.

While CEOs delegate day-to-day tasks, they remain responsible for overall operations. They oversee performance by monitoring key indicators to ensure the company stays on track. Tim Cook of Apple maintains a focus on operational excellence and supply chain management, ensuring products meet quality standards and are delivered efficiently. In times of crisis, CEOs lead the company through challenges such as economic downturns or public relations issues. Mary Barra, CEO of General Motors, steered the company through massive recalls and shifted focus toward electric vehicles, demonstrating resilience and forward-thinking.

Effective communication with stakeholders is a vital component of a CEO’s role. They engage with shareholders to build confidence in the company’s direction, exemplified by Warren Buffett’s transparent annual letters to Berkshire Hathaway shareholders. Serving as the public face of the company, CEOs represent their organizations at conferences, in interviews, and on social platforms. Although, as Elon Musk has shown, CEOs should probably set their social media on fire unless they want a visit from the SEC.

Does Higher CEO Pay Equal Better Performance?

Despite these significant responsibilities, a pressing question remains: Does higher CEO pay translate to better company performance?

A study by MSCI Inc. examined the pay of over 800 CEOs at 429 large and mid-sized U.S. companies from 2005 to 2014. It also analyzed the total shareholder return of these companies during the same period. The findings were surprising. Companies with the highest-paid CEOs (top 20%) delivered lower shareholder returns compared to those with lower-paid CEOs (bottom 20%). Specifically, $100 invested in companies with the highest-paid CEOs would have grown to $265 over ten years, while the same investment in companies with the lowest-paid CEOs would have grown to $367.

This trend persisted even when adjusting for company size and industry sector, suggesting that the correlation between high CEO pay and lower company performance is widespread.

Possible explanations for this paradox include:

• A short-term focus driven by compensation packages heavily tied to immediate performance metrics, incentivizing CEOs to prioritize short-term gains over long-term stability.
• Overconfidence, prompting CEOs to make aggressive moves that don’t always yield positive results.
• Weak oversight, where CEOs have significant control over their pay without sufficient checks from the board or shareholders, leading to misaligned interests.

Looks like the sacred fiduciary duty isn’t being taken that seriously. Honor is such a bygone virtue. What happened to the Game of Thrones type oaths? You know nothing, CEOs.

Rethinking CEO Compensation

The study’s implications for corporate governance are significant. It suggests a need to reconsider how CEOs are compensated, potentially shifting toward long-term performance incentives that align more closely with sustainable company growth.

Enhanced transparency—such as requiring detailed disclosure of cumulative incentive pay over extended periods—could help stakeholders better assess the alignment between CEO compensation and company performance. By doing so, companies can foster a culture of accountability and ensure that executive interests are more closely tied to those of shareholders and other stakeholders.

The assumption that generous compensation packages attract the best talent and motivate superior performance is challenged by these findings. Notable examples include instances where CEOs receive substantial pay even when their companies underperform. For instance, during periods when their companies’ stocks stagnated or declined, certain CEOs still enjoyed significant compensation increases. Conversely, some successful companies are led by CEOs with comparatively modest salaries, indicating that high pay isn’t a prerequisite for effective leadership. This suggests that factors such as vision, leadership style, and strategic decision-making may play more critical roles in a company’s success than compensation alone.

The income disparity between the lowest-paid worker and the CEO is more like a king and a peasant than colleagues.

The Future of CEO Pay

Understanding what CEOs do is crucial for stakeholders at all levels. While they hold the reins of the company’s future, their effectiveness is determined not just by their decisions but also by how their motivations align with the company’s long-term success.

The role of a CEO is undeniably complex and influential, shaping strategic vision, making pivotal decisions, and setting the tone for company culture and ethics. However, the correlation between their compensation and company performance is not as straightforward as traditionally believed.

Generally, the best CEOs are those who not only drive profitability but also foster sustainable growth, ethical practices, and positive impacts on employees and communities.

It’s time for companies and investors to look beyond compensation figures and focus on the true value a CEO brings to the organization. By aligning CEO incentives with long-term performance and ensuring rigorous oversight, businesses can promote leadership that benefits all stakeholders. This shift could lead to more sustainable business practices, improved company performance, and greater shareholder satisfaction.

I still think CEO is a made-up job for rich people, like board directors raking in six figures for attending four meetings a year. I love a good scam.