DirectorsatWork 207the successor. There is little reason to believe that even the most
outstanding CEO is as good as a top board at picking a new CEO.
The result is too often the need to oust the new CEO pretty early
in his or her tenure.
Still, boards must evaluate a CEO’s performance regularly and
out of the CEO’s presence, and evaluating that performance is hard-
er than it seems. Both short-term results and potential long-term
results must be assessed. If only short-term results mattered, many
managerial decisions would be much easier, particularly those relat-
ing to businesses whose economic characteristics have eroded.
Recall again Al Dunlap’s aggressive and doomed plan to turn
around the ailing Sunbeam. The huge accounting scandal that fol-
lowed in its wake also suggests its inherent stupidity. Once it was
clear that Dunlap was a terrible manager, it was easy for the Sun-
beam board to throw him out, but before the fallout he looked at
worst mediocre and therefore harder to disagree with.
PAY
Plenty of evidence shows that the total level of executive compen-
sation in the United States is positively correlated with the level of
corporate performance. Some evidence even shows a positive cor-
relation between performance and the portion of total compensation
paid in stock.^3
Even so, it is also obvious that some executives are paid sub-
stantially more than they should be in light of their performance.
Accordingly, investors should pay close attention to potentially pi-
ratical executive compensation.
Compensation Levels
This is not to say that it is desirable to have governance rules that
limit top executive compensation to some ratio of the pay of the
least compensated employee at a company. Indeed, Ben & Jerry’s
tried this during its early years of business life, capping its founder’s
and chief’s compensation at seven times that of the lowest-paid
worker. But once the company outgrew its founder’s managerial
skills, it was forced to go on the market to recruit top talent, and
that required a pay package way higher than that cap.^4