Part 6: Be CEO

“In 2014, just before the Google acquisition, Nest spent around $250,000 per employee per year. That included decent office space, good health insurance, the occasional free lunch, and fun perks from time to time.

After we were acquired, that number shot up to $475,000 per person. Some of the increase was due to corporate red tape and increased salaries and benefits, but a lot of it was the added perks of free buses, free breakfast, lunch and dinner, tons of junk food, gleaming conference rooms with full A/V setups, and new office buildings. Even IT was expensive. It cost $10,000 per year to connect each employee’s computer to the Google Network and that didn’t even include the price of the laptop.

While CEOs often justify megamergers by promising increased operating efficiencies, research suggests that the real benefits are less about economies of scale and more about oligopolistic advantage. A comprehensive study of the US economy by Jan De Loecker, Jan Eeckhout, and Gabriel Unger found that “markups,” a proxy for market power that measures firm-level difference between prices and marginal costs, have increased sharply over the last several decades. In 1980, the average firm charged 21 percent over marginal cost; by 2016, the average markup had grown to 61 percent. This trend has been observed not only in the United States, but in other developed economies as well.

First, senior leaders often have much of their emotional equity invested in the past. The average age of an S&P 500 CEO is currently fifty-eight, up three years since 2008. Average tenure is eleven years, the longest since 2002. While veteran leaders may have the benefit of experience, they’re weighed down by legacy beliefs. Many of their assumptions about customers, technology, and the competitive environment were forged years or decades earlier, and reflect a world that no longer exists.

While most CEOs acknowledge the virtues of free markets, the companies they run are typically structured like command economies. As in the former Soviet Union, decision-making power is highly concentrated at the top. Changing this is essential to making our organizations more resilient, innovative, and human. To see how this might be done, we need to understand the conditions under which markets outperform hierarchies and then try to imagine how these advantages might be replicated within our organizations.

In 1965, chief executives in the top 350 U.S. firms took home roughly twenty times the pay of an “average worker.” By 1980, CEOs in the same top bracket of firms took home thirty times the annual salary of an average worker, and by 2015, that number had surged to just shy of three hundred times. Adjusted for inflation, most U.S. workers gained a modest 11.7 percent rise in real wages between 1978 and 2016, while CEOs typically enjoyed a 937 percent increase in remuneration.