Why Do CEOs Make So Much?

January 15, 2016
Jeff Brown, MD

As more physicians become employees of large organizations, CEOs are taking on a larger and larger role in our nation's healthcare. So what makes a good CEO, and why do they receive such high pay?

With over 50% of America’s docs working for someone else, and rising, CEOs are becoming more important to how healthcare is structured, to our professional careers, and to how we are able to help our patients. By the way, over 60% of healthcare CEOs have no professional tie to any past healthcare position and only one-third are MDs. Professional manager CEOs are increasingly dominating healthcare.

Briefly, a CEO’s primary functions are to provide a vision for the future, communicate that vision effectively, procure and place assets properly, and select talent to achieve his/her stated goals. And for bearing these responsibilities, they are paid very handsomely. So handsomely in fact, that the size of their compensation has become a big issue in our national discourse.

Specifically, the average CEO was paid $10.5 million in 2013 with the top 65 taking home over $20 million each. We like watching stars, high-achievers but are they really worth being paid up to 250 times what their average employee earns?

The underlying belief that fuels these numbers is that “talent is rarer than ever” and only outsize rewards can lure and retain the best people. But an increasing number of studies have refuted these claims.

After studying the subject, Walter Frick reported in The Harvard Business Review, that “no single trait or skill” stands out among these titans of management, and “luck plays a very large role.” He concludes that only about 5%(!) of a company’s performance on average is attributable to its CEO. Market and other forces are so large and powerful that they simply dwarf any individual’s efforts, no matter how smart, hard working or charismatic that person may be.

Yet the average CEO lasts just over four years, being held accountable only for about 20 quarters of corporate results. This phenomenon fuels the widely criticized practice of corporations focusing too much on the short term, in lieu of longer-term results. And CEO turnover costs, often in the millions, including so-called “golden parachutes” being the norm, are a surprisingly large expenditure that do not usually show up on any balance sheet.

So what makes a successful CEO? Again studies show that they are not particularly more able or talented than many other kinds of professionals, docs included. What they do have, often in spades, according to Stanford’s Charles O’Reilly’s research published in The Leadership Quarterly, is a significant amount of narcissism.

O’Reilly defines narcissism as a personality type characterized by dominance, self-confidence, a sense of entitlement, grandiosity, and low empathy. They also tend to be impulsive and manipulative. They often are charming, able to win over their board to secure big rewards and simultaneously “…eliminate those who might challenge them or fail to acknowledge their brilliance.”

Lovely, huh? Another word that often applies is ruthless, one more difference why narcissists make more than you do. A CEO once candidly told me of a board meeting at which his VP of Sales was proud to announce that he had achieved a 12% increase that quarter in spite of a down market. The CEO asked in a Socratic manner, “What were you told to achieve?” “15%” was the reply. The CEO said, “You’re fired.” …. Most docs do not have that “ability” in our DNA, thanks be. But if you find yourself working for a CEO who does, be on notice.