Pepsi and the Paradox
of CEO Surplus

If supply goes up, and demand doesn't, shouldn't prices fall? We look at one marketplace — the market for CEO 'talent' — where the laws of supply and demand simply do not seem to apply.

August 21, 2006

PepsiCo last week named a new CEO, and the choice raised eyebrows. Indra Nooyi, the new chief, will be the first woman to ever hold Pepsi's reins. PepsiCo's widely applauded announcement brings the number of women topping Fortune 500 companies to an even dozen. That's not much, of course, less than 1 percent of the major CEO universe. But the faces in Corporate America’s executive suites are indeed changing. A generation ago, no woman led a Fortune 500 corporation.

And Indra Nooyi isn’t just a woman. She’s a woman of color, born, raised, and educated in India. In effect, in her one person, Nooyi symbolizes the deep changes that are percolating in America’s Fortune 500 CEO job market.

Not too long ago, corporate headhunters on the lookout for executive talent did all searching in an artificially limited field. If they weren't looking at a white, American-born male, they weren't at a serious candidate.

But not anymore. The universe of potential CEOs is expanding at corporate light speed — to include not just American white males, but women, people of color, and even foreigners. The supply of prime CEO material has never been streaming stronger.

So how can CEO pay, year after year, still be rising?

We live, after all, in a market economy, ruled by the laws of supply and demand. According to these laws, if supply outpaces demand, prices should sink. But that’s not what’s happening in the CEO pay market.

In this market, we have a soaring supply of potential CEOs — as Indra Nooyi’s hiring so aptly illustrates — and a steady demand (we still have, last time anyone looked, only 500 Fortune 500 companies). Yet CEO pay keeps climbing, at a clip far faster than the pay of average corporate employees.

Last year alone, notes the Wall Street Journal, top exec pay jumped nearly 16 percent, about eight times faster than weekly earnings for typical full-time American workers.

So what ever happened to supply and demand?

Apologists for contemporary CEO pay levels have an answer. People with the smarts to become quality CEOs, they insist, still don’t grow on trees.

Super CEO salaries and prodigious CEO perks make perfect market sense, as executive pay consultant Steven Hall has contended, because “not many people have the God-given gift to run a corporation successfully.”

And God appears to be giving out fewer gifts. Movers and shakers on corporate boards of directors are constantly anguishing about what they see as a shrinking supply of top executive talent. And this shrinking supply, they insist, explains why CEO pay packages are soaring.

American business leaders take this scarcity as a given. How else, in a market economy, to explain rapidly rising CEO compensation? If quality CEOs were plentiful, executive compensation would not be soaring. But executive compensation is soaring, so qualified CEOs obviously must be few and far between — and totally deserving of whatever many millions they receive. That’s simple market logic.

And simply wrong. American corporations today confront no scarcity of executive talent. The numbers of people qualified to run multibillion-dollar companies have never been more plentiful then they are now.

The biggest generator of this executive talent? Let’s turn back to Indra Nooyi, PepsiCo’s new CEO. Pepsi didn’t bring Nooyi to the United States. Yale did. Nooyi, after completing undergrad and grad work in India, earned a master’s in management at Yale's business school.

Lots of people have been earning business degrees from America’s elite universities.

America’s first graduate school for executives, the Tuck School of Business at Dartmouth, currently boasts an alumni network over 7,000 strong. Alumni from the equally prestigious Harvard Business School total over 65,000.

Add in the alumni from other widely acclaimed institutions and the available supply of executives trained at top-notch business schools easily approaches several hundred thousand.

Just how many of these academically trained executives have the skills and experience really needed to run a Fortune 500 company? Ten percent? Five? Let’s assume, conservatively, that only 1 percent of the alumni from America’s best business schools have enough skills and experience to run a big-time corporation.

If this assumption were accurate, then the seven or eight dozen Fortune 500 companies that go looking for a new CEO every year would be able to choose, at minimum, from between 2,000 and 3,000 eminently qualified candidates. Do the math. Several thousand qualified candidates, less than a hundred vacancies. No supply shortage here.

Not all corporate insiders, to be sure, consider elite business schools a suitable source for top-notch executive talent. Some skeptics openly disparage the book learning that goes on in academic business training. They only trust and admire executives who have spent long years working their way up corporate ladders, learning lessons at corporate life’s always demanding schools of hard knocks.

These skeptics may or may not be right in their judgments about academic business training. But they still have no valid reason to worry about a scarcity of executive talent. In today’s globalized world economy, quality “graduates” from schools of hard knocks abound more plentifully than ever before.

Years ago, American corporations seldom looked beyond the borders of the United States for executive talent. That tunnel vision, at the time, made sense. Executives inside the United States and executives outside worked in different business environments. Foreign executives could hardly be expected to succeed in an unfamiliar American marketplace, even if they did speak flawless English.

But today, in our “global” economy, distinctions between domestic and foreign executives no longer matter nearly as much. In dozens of foreign nations, in hundreds of foreign corporations, executives are competing in the same global marketplace as their American counterparts. They’re using the same technologies, studying the same data, and strategizing toward the same business goals. They are, in short, learning the same hard-knocks lessons.

Together, taken as a group, these executives from elsewhere in the world constitute a huge new pool of talent for American corporations.

Pay consultants in the United States already acknowledge the reality of this global marketplace for executive talent. In fact, they actually cite global competition as one reason why executive pay in the United States is rising. American companies now have to compete against foreign companies for executive talent, the argument goes. This competition is forcing up executive pay in the United States.

Really? What ever happened to market logic? If corporations all around the world paid their executives at comparable rates, market competition would certainly force up executive compensation worldwide.

But corporations don’t all pay executives at comparable rates. American executives take home significantly more compensation than their foreign counterparts. By classic market logic, any competition between highly paid American executives and equally qualified but more modestly paid international executives ought to end up lowering, not raising, the higher pay rates in the United States.

Why, after all, would an American corporation pay $50 million for an American CEO when a skilled international CEO could easily be had for one-fifth or even one-fiftieth that price?

We have here, in short, a situation that a deep, abiding faith in the “market” does not explain. In the executive talent marketplace, American corporations face plenty, not scarcity, yet the going rate for American executives keeps rising — even as more and more “low-wage” executives from foreign nations enter the competitive fray.

Has someone repealed the laws of supply and demand? How else could executive pay in the United States have ascended to such lofty levels?

Some analysts do have an alternate explanation to offer. Markets, they point out, still operate by supply and demand. But markets don’t set executive pay. Internal corporate power dynamics do.

Top executives in the United States today essentially set their own pay. They sit on each other's boards of directors. They seldom face pushback from an organized workforce. And they have precious little to fear from shareholders or government regulators.

Indra Nooyi has joined the ranks of a most fortunate bunch.

— Sam Pizzigati

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Labor journalist Sam Pizzigati, the author of Greed and Good: Understanding and Overcoming the Inequality That Limits Our Lives, edits Too Much, an online weekly published by the Council on Economic and Political Affairs.

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