CEOs Get Paid Well Because Firing The CEO Can Add $15 Billion To GE’s Value

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The question is not whether this ought to be true or not. It is, rather, whether it is true or not. And it is true – a change in CEO is worth $15 billion on the value of General Electric. And if the choice of CEO is worth $15 billion then it’s not hugely a surprise that CEOs get paid some fraction – says, 0.1% a year – of that value now, is it?

Sure, they didn’t build that but still:

On August 28, 2000, Apple’s hottest product was a candy-colored computer, Donald Trump was a New York real estate mogul and General Electric Co. was worth some $600 billion.

Apple and Trump have gone on to greater things. GE? It’s on the verge of a staggering milestone: a half-trillion dollars in market value wiped out since that all-time high 18 years ago. On Monday the company made the surprise announcement that it was replacing Chief Executive Officer John Flannery, who has been unable to stem the slide in the company’s shares after just more than a year in the job.

Perhaps the earlier two should have gone earlier than they did but his job was to do something about it and he didn’t:

GE shares jumped 14 percent to $12.88 in early trading as investors bet Culp could re-energize the GE brand and more quickly transform its portfolio. The shares had dropped more than half since Flannery became CEO in August 2017, replacing Jeff Immelt, who had led GE since 2001.

Given that first valuation at about $100 billion, that rise of 15% or so, that’s a rise in value of $15 billion just by the firing of one single CEO.

The shares had more than halved since Flannery, a three-decade GE veteran, became CEO in August 2017 to replace Jeff Immelt, who had led GE since 2001.

That’s rather why they’ve brought in an outsider too. It’s not just the CEO, they’re beginning to think there’s something wrong with the whole set up. And they might be right of course.

As above, sure, you can argue it shouldn’t be this way. The CEO leads but doesn’t actually do everything, we can’t and shouldn’t ascribe all the value to them. But quite clearly people do ascribe considerable value to who is CEO. And thus it’s entirely unremarkable that CEOs get well paid. Anyone who can move assets prices by $15 billion is going to gain a piece of that value for themselves.

Which is why CEOs get paid a lot – they’re valuable.