How much is it worth to retain a star CEO?

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The writer is a former investment banker and author of ‘Power Failure: The Rise and Fall of an American Icon’

How much is a top chief executive worth to a company? Still quite a lot, in the estimation of US boards and shareholders.

The latest evidence comes in the form of a new deal this week to extend the contract of Disney chief executive Bob Iger by another two years to the end of 2026. The new contract for Iger, who was parachuted back into his old job at the company after the ill-fated tenure of Bob Chapek, includes the opportunity to earn five times his base salary in annual bonuses, up from one times salary previously.

Such magnanimity is far from exceptional in the US when it comes to star CEOs, even when it appears they could be inclined to stay on without additional inducement.

In July 2021, in the middle of the pandemic, the board of directors of JPMorgan Chase gave its heralded chief executive, Jamie Dimon, a retention bonus then projected to be around $50mn, in the form of stock options that he can exercise if he sticks around the big Wall Street bank until 2026.

Dimon, now 67 years old, is a billionaire, thanks to his successful nearly 20-year stewardship of the bank and, despite occasional flirtations with the idea of running for US president, he wasn’t making noises about leaving JPMorgan anytime soon.

One of the few criticisms of Dimon’s tenure has been that he has failed to position a clear successor to take over from him. The unexpected 2021 retention bonus only exacerbated that perception. So why did the JPMorgan board give Dimon the extra $50mn if he stays at the bank until he’s 70? Who knows? The board hasn’t said much other than it just wants him to stick around.

Not to be outdone, three months later, the board of Goldman Sachs awarded both David Solomon, its CEO of three years, and John Waldron, its president and chief operating officer, their own multimillion-dollar five-year retention bonuses, projected then to be worth $30mn and $20mn, respectively.

The so-called “Shareholder Value Creation Award” was meant to “ensure leadership continuity” as well as increase the Goldman stock price in “a balanced manner” that would not “encourage imprudent risk taking.” Why would the Goldman board offer the two men these extra awards? Was not their annual compensation in the tens of millions of dollars enough to keep them around Goldman and without taking imprudent risks?

And then there is what the GE board of directors gave Larry Culp in August 2020 to retain his services. Culp became CEO of GE in October 2018 and at the time was given a four-year contract — the first GE chief to have an employment contract. That paid him as much as $21mn annually in a combination of cash and stock. The board also gave Culp an “inducement award,” a large stock grant of up to 7.5mn GE shares that would vest in three tranches of 2.5mn shares each, but only if certain stock price targets were met and he stuck around the company.

Initially, things did not go as Culp maybe would have hoped. The GE stock floundered during the pandemic as the company’s business soured, and reached a low of $55 a share in May 2020. Culp’s “inducement award” was looking unattainable. In August 2020, the board came to his rescue, with a new “Leadership Performance Share Award”.

The original stock price targets were lowered dramatically, making it easier for Culp to get the extra stock award. The GE share price has increased around 50 per cent under Culp’s nearly five years at the helm. But the share price is still below the original stock-price target for the first tranche of stock that the board awarded him when he took over (after taking into account a share consolidation and spin off of GE Healthcare) . Instead, thanks to the August 2020 redesigned deal, I estimate Culp will probably end up more than $300mn richer — his four years of annual compensation plus his vested, re-cut stock award.

Why do the boards of companies feel the need to give their already wealthy and properly rewarded CEOs even more financial incentives to do their jobs? None of the boards has satisfactorily explained its logic, beyond the usual corporate drivel. Notably a majority of shareholders voted against the 2021 JPMorgan and GE executive remuneration plans in non-binding say on pay.

At a time when income inequality is reaching absurd levels, when is enough, enough? Most people are happy just to have and to keep their jobs. So why do boards of directors feel the necessity to bulk up already high executive pay just to keep leaders around? I don’t have a good answer but I sure would like to know.