Steve Jobs’ announcement that he’s taking medical leave led to an 8.3% drop in Apple’s share price. This suggests he is worth $26.5bn to Apple shareholders.
This is vastly more than even the best paid CEOs get, and suggests that Mr Jobs’ $1 salary is one of the great bargains of all time.
Which poses the question: could it be that bosses are actually underpaid?
Of course, it would be silly to infer anything from an outlier such as Mr Jobs. But we don’t need to do so. Matthew Sinclair has directed me to an interesting study which looks at share prices’ reaction to the sudden death of a top executive. The thinking here is that the shares’ reaction is equal to the contribution the boss is expected to make to the company in future, minus his pay. A price fall upon the death of a boss therefore indicates that the market thinks he generates more wealth for shareholders than he is paid, whilst a rise indicates that he destroys shareholder value. So, what do the figures say?:
Compiling a sample of 149 executives who suddenly died in the United States from 1991 to 2008, we find that, following death, stock prices drop by 1.22% on average. Since the average capitalization of firms in our sample is $1.5 billion, average firm value decreases by almost $18.8 million
Granted, there is variation around this average: in 67 of the 149 cases, share prices rose, indicating that the executive subtracted shareholder value. And overall, most of the value generated by bosses - four-fifths - flows to bosses, not shareholders.
Neverthless, this suggests that, on average, the managerial labour market is tolerably efficient. If anything, bosses are a little underpaid. However, I have three quibbles here.
1. Are bosses who drop dead suddenly really representative of average bosses? Possibly not. It could be that they die early because they work harder and neglect their health, or worry more about their company and so succumb to heart disease. If it is the case that the good die young, then the sample of dead bosses overstates the contribution that all bosses make to the firm.
2. Share prices might not fall merely because shareholders lose the boss’s skills. The death of a boss creates uncertainty about the future of the company, and shares must fall to reflect this. Because a man’s sudden death naturally unsettles us and makes us anxious, this uncertainty effect might be large.
3. This study only tells us about the market’s opinion of a boss’s contribution. But what if this opinion is systematically biased upwards? If investors believe in the myth of leadership, they will collectively overstate the value of bosses. In such a case, share price reactions merely capture the extent of belief in this illusion.
So, I’m not convinced that bosses are underpaid. But then, I’m not sure what sort of evidence would be convincing here. Whether this is because my prior antipathy towards bosses is strong, or because the evidence is inherently elusive, I’m not sure.