The rich truly are different… Chief Executives, age and what that tells us about the society…

I was pretty entertained by a piece in the Irish Times on Monday. Straight from the Business section it was part of a syndicated column from the Financial Times by John Gapper. He noted:

…the news this week that Tim Mason, the 50-year-old head of Tesco’s US operations, is ruling himself out of the race to succeed Terry Leahy as the company’s next chief executive on the grounds that he is too old.

Anyone who is 50, or approaching that age (for those wishing to send me a card, May 31 2009 is the date), must feel a pang at the idea that we are over the hill. Mr Mason’s logic, picked up by the FT on a tour of Tesco’s Fresh & Easy US stores, is that Mr Leahy will be there for some years yet and the board will seek a successor who can stick around for a bit.

He continues:

To judge by the average age of chief executives in the US, Mr Mason may be being a little over-sensitive. According to Spencer Stuart, the head-hunting firm, the median age of new CEOs of S&P 500 companies last year was 52. This week, Sprint Nextel appointed Dan Hesse, a “54-year-old telecom veteran”, as Dow Jones put it, to be its new chief executive.

Indeed:

“My feeling is that people have to change their perception and say: ‘I am still going for it. I am a contender’,” says Jeri Sedlar, a senior adviser to the Conference Board, the US business research group, on such matters.

But UK companies appear to favour fortysomethings these days, perhaps encouraged by the practice of splitting the jobs of chairman and chief executive, which allows experience and energy to be bundled separately. Andrew Witty, designated successor to Jean-Pierre Garnier as chief executive of GlaxoSmithKline, is a mere 43. “When I heard that,” says Ms Sedlar, “I said: ‘Whoah!'”

And:

One reason that chief executives used to be older is that more stayed at the same company for most of their careers and gradually worked their way up. The corporate world was also a more stable place, with not only less job-hopping but also a greater expectation that one company would be able to maintain competitiveness over decades within its industry.

In that world, it made sense for jobs to be arranged according to an age pyramid, with people hitting the top within striking distance of retirement. Having a younger chief executive would have disturbed the carefully constructed system of training and advancement.

But it is fading and an open market for executive talent is emerging instead. The average tenure of CEOs is falling as investors become less tolerant and there is greater demand for executives in their 40s with leadership potential. Private equity funds are eager to recruit them and head-hunters tout them to other companies that need a boost.

For the most part, these recruiters are acting rationally. They know that someone who has run a couple of divisions at a big company by the time he or she is 45 has enough experience to be given a shot at a top job. There is no need to hang out for even more grey hair.

It all sounds so… benevolent and reasonable. Gapper even treats the story as a bit of a laugh.

In short, the fact that chief executives are getting younger does not mean that the rest of us are doomed. I am not sure I even take at face value that Mr Mason really believes he is past it. He may not be Tesco’s next boss, but he has sent a signal that he is available.

They’re wily, those 50-year-olds.

Still, as someone who has passing experience at directors level in companies I can point to at least one other reason underlying the falling age of Chief Executives. And this is the extravagant and indulgent levels of remuneration that many (though not all by any means) receive. The idea is that they will be able to retire, not in their late 60s or even early 70s as we are exhorted to by our political representatives, but in their mid-50s and with sufficient funding both from pensions, accumulated saved wages and golden handshakes that they can maintain a high standard of living.

Consider another story from the FT from October where Francesco Guerrera and Daniel Pimlott (a relation of Ben?) reported that:

US companies are facing fresh pressure from regulators and shareholders to rein in excessive executive pay as research shows chief executives have been paid up to 10 times more than their top lieutenants.

The average total compensation for a S&P 500 chief executive was about twice as much as the second most highly paid executive last year, according to a study conducted for the Financial Times by the research group, Salary.com.

However, at SLM, the student loan group known as Sallie Mae, the pay of Thomas Fitzpatrick, chief executive, who resigned in May, was more than 10 times that of June McCormack, his executive vice-president.

At more than 30 other companies, the gap ranged from four times to seven times.

Note though that this did not go unnoticed with:

The Securities and Exchange Commission is believed to have asked a number of companies to explain the reason for large pay gaps between top executives, as part of a review of corporate pay.

The rationale between such investigations is that:

Investors argue a huge pay differential may be a waste of shareholder funds; indicates the board is not an adequate counterbalance to the chief executive’s powers, and could drive away talented young executives.

“[The gap] is a red flag for investors. It is a classic sign that the board may be beholden to the chief executive,” said Christopher Ailman, chief investment officer of the California State Teachers’ Retirement System (Calstrs), the US pension fund.

Difficult to know… certainly consider the disparities between the executives and the rest of the workforce and while one might laud the SEC for taking an interest, one might consider just why it is that it doesn’t take the next logical step.

Still, expect a defense of such things, whether jocular or otherwise. Perhaps along the lines of:

Barry Diller, chief executive of internet group IAC, [who] has lashed out at corporate governance reforms for undermining the competitiveness of US business and dismissed executive compensation as “no big deal” for shareholders.

In an interview with the Financial Times, Mr Diller, one of the best-known and best-paid media executives, said the greater scrutiny of corporate America had made management overlycautious and was pushing many companies, including his own, to consider going private.

Go on…

“We [Americans] have found ways to take our competitive edge actually mechanically away from us,” Mr Diller said. “You have boards now that are skittish in every area. They’ve made chief executives very skittish.”

The former head of Paramount Pictures and founder of News Corp’s Fox television network, Mr Diller has built IAC into a collection of internet businesses, including the Expedia travel service, Ticketmaster and Match.com dating site.

Lovely…

More recently, he has become both a target and vocal critic of the corporate governance movement, which has risen up in the wake of US business scandals, such as Enron.

Mr Diller said executive compensation was “a very tiny slice” of companies’ overall expenses and blamed journalists for inflaming the issue. “I think it’s close to criminal,” he said of recent press coverage critical of high levels of executive pay.

But let’s contextualise this in terms of money…

Mr Diller came to the defence of Robert Nardelli, the former Home Depot chief executive, who was lambasted by shareholders after he left the company and got a $210m severance package in spite of its poor performance.

Bravo Mr. Diller.