The minus-$18 billion-dollar man

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Alex Tabarrok, an economist at George Mason University, pointed out that the market value of Microsoft increased by $18 billion Friday when CEO Steve Ballmer announced his retirement.   Tabarrok made an interesting argument that if the choice of a CEO really changes the value of a company by $18 billion, then it isn’t unreasonable to pay the CEO an eight-figure salary.

Steve Ballmer

Of course if you valued corporate employees by the damage they could potentially do, many of us would be paid more than we are.   When I was a newspaper reporter, I saved my company millions of dollars by not writing anything that was libelous, but I don’t think that ever was reflected in my paycheck.

One of Ballmer’s bad innovations was “stack ranking,” which meant ranking employees in order of some performance standard and firing the ones at the bottom.  One thing wrong with that is that it gave the employees an incentive to undermine each other rather than working together to make Microsoft a good corporation.  The other is that, as W. Edwards Deming noted, rank order is meaningless.  What counts is whether your performance meets or exceeds the desired standard.

Click on The Value of a CEO for Alex Tabarrok’s post on Marginal Revolution.

Click on How Microsoft lost its way for my earlier post on Microsoft and stack ranking.

[Update]  Actually Steve Ballmer had a bigger impact on Microsoft’s market value than I gave him credit for.

Source:Zero Hedge.

The uptick in Microsoft’s stock price when Ballmer left reportedly increase the value of his own portfolio by $800 million.  So it was a win-win situation.

Tags: Business management, CEO Compensation, CEO pay, Microsoft, Microsoft Market Value, Stack Ranking, Steve Ballmer, Stock Market