Talented or lucky?

The Sunday NY Times had a piece highlighting a high-profile divorce case involving a CEO that hinges on “active versus passive appreciation.” Basically, if a spouse owns an asset before the marriage that passively appreciates, that asset is not subject to division. It basically is saying that the asset increased due to outside forces and not the actions of the party to the divorce. So, you’re a high-flying CEO with an asset before the marriage that has appreciated quite substantially. What do you claim – passive or active appreciation? In other words, were you lucky that the firm grew substantially (passive) or was it due to your efforts (active). In this particular case, the CEO is either humble or needs the money, because he is claiming it wasn’t him, but the outside forces that created his organization worth $18 Billion.

It raises the interesting question about to what extent CEOs and leadership teams are responsible for the success or failure of their organizations. In the article, a study is cited suggested that luck contributed to 25% higher pay for the lucky CEOs…and it also notes that luck is a slippery concept to define. Conventional wisdom is that well-run companies do better, and in the US, at least, this had led to a skyrocketing ratio between the highest and lowest paid people in an organization. If you haven’t been paying attention. here’s a few factoids from a Boston Globe article:

• In the US, compensation for chief executives soared 937% percent between 1978 and 2013 [not a typo], while the average worker’s compensation climbed just 10% –nearly 296 times higher than the average worker’s earning. In 1978, the ratio of CEO to average worker pay was 30:1.

The rate of pay would suggest that it is active appreciation that is at play – that is, that the CEO’s are making it happen, thus worth the tremendous amount of money they are paid. For me, I do believe in the value of having a well-run company (one that employees foresight, of course) and that the leaders makes a difference; but I also see, in systems terms, that there are so many other factors involved in firm performance beyond the leader, that a 296:1 ratio is absurd and outrageous. Perhaps the most ironic part of this story is, for the CEO(s) is that those in the divorce dilemma above are “forced” to lie to protect their assets, but are they really lying? Wouldn’t it be interesting if we could put all CEOs to this test? Andy Hines