Gilbert and Sullivan wrote a song about the "model of the modern major general." If they were to update their music to the present, they would sing about the "model of the modern American CEO." And the model they would have in mind would doubtless be John F. Welch Jr., the chief executive officer of General Electric Co.
Jerry Roche, the legendary executive recruiter and as good a judge of horseflesh as there is, has opined that if he were asked to do a search for president of the United States, Jack Welch would be his No. 1 candidate.
Taking over a company the size of GE in March 1981 at only age 45 and coming from a science background (a Ph.D. in chemistry) would have made Jack Welch different enough. But what really made him different was the ferocious way he plunged into his job. Normally, a person taking command of a ship the size of GE would, at most, order a course of change of a few degrees or so. But not Jack Welch.
Early on, Mr. Welch decided that unless GE would be No. 1 or No. 2 in a particular business, it ought to exit that business and find some other business to be in. Thus, businesses that long had been a part of the GE landscape were consigned to oblivion. New businesses appeared. In the process, thousands upon thousands of employees were sent packing to the point that Mr. Welch earned the unwelcome sobriquet of "Neutron Jack" (like the neutron bomb, it was said that after Mr. Welch visited a plant, all the people would disappear, but the plant would remain standing.)
Mr. Welch's manic behavior certainly transformed GE. During the period between 1980 and 1992, its sales more than doubled - from $25 billion to $56 billion. And its earnings per share after extraordinary items more than tripled - from $1.66 to $5.51. But what really impressed many people, and particularly the members of Mr. Welch's board of directors' compensation committee, is what he did for the company's market value. Consider this telling sentence from the compensation committee's report to shareholders in the 1993 proxy statement: "The key performance measure the committee used in determining Mr. Welch's 1992 compensation was its assessment of his ability and dedication to enhance the long-term value of the company by continuing to provide the leadership and vision that he has provided throughout his tenure as CEO, during which GE's market value has increased by approximately $60 billion." So impressed, the compensation committee gave him a 1992 pay package I value at $15.5 million.
While all this was going on, journalist after journalist trooped to GE's Kremlin-like headquarters in Fairfield, Conn., to interview Mr. Welch in an office that makes the Oval Office look a bit shabby. And journalist after journalist then trooped back to their offices to write laudatory stories about Jack Welch. In the process, he has become an icon and a role model for every CEO.
Now we don't mean to pour cold water on all of the wonderful appraisals, but we have to ask a question: Has he been paid for his performance, or has he been paid for his glorious reputation? Sadly, we have to conclude he has been paid for his reputation.
For openers, we have to look at the chairman of Mr. Welch's compensation committee, the redoubtable Walter Wriston, who once headed Citicorp and, many believe, almost ran it into the ground. Mr. Wriston apparently steered his ship using only a single instrument: bigness. We figure it was Mr. Wriston, enamored as he seems to be by bigness, who drafted that remark about Mr. Welch having increased the market value of GE by almost $60 billion. Unfortunately, Mr. Wriston seems to have confused market value with shareholder value.
From March 31, 1981, to Dec. 31, 1992, GE's market value rose to $73 billion from $15 billion. Compared to my study group of the 200 companies with the largest market value in 1992, GE's $58 billion rise puts it in third place - behind Wal-Mart's $72 billion increase and Philip Morris' $62 billion.
But consider an investor in 1981 could have bought a zero-coupon, risk-free, 10-year Treasury bond (assuming one were available) and could have earned a compounded return of 13% per year. If you increase GE's March 1981 market value of $15.3 billion by 13% per year for 10 years, you end up with a value in March 1991 of $51.9 billion. At that point, you could reinvest your zero-coupon bond proceeds, not at 13%, but at about 8%. By Dec. 31, 1992, your $51.9 billion would have increased to $59.4 billion, for a total increase of $44 billion. Viewed from that perspective, the bulk of the $58 billion increase in market value engineered by Mr. Welch could have been obtained by even the dullest graduate of the worst business school in the United States.
Taking another measure, how did GE fare, compared with my 200-company study group, in terms of the percentage increase in market value? These statistics don't look so good. GE's 379% increase in market value ranked it 101st.
Even more important, how about the compounded annual shareholder return during the period (i.e., stock price appreciation and dividends)? Well, GE did a bit better here. Its 18.9% compounded annual total return ranked it at the 51st percentile of the distribution.
So if you're only performing in the middle of the pack, doesn't a pay package of $15+ million sound a tad high? And if you're only performing in the middle of the pack, doesn't your total compensation of more than $85 million during the 11 years between 1982 and 1992 seem a bit steep? (I am counting Mr. Welch's base salary, annual bonus, option gains - including paper profits on unexercised options at the end of 1992 - and the value at grant of restricted stock awards. But I am not counting the run-up in value of the same restricted stock awards after their grant or his substantial package of fringe benefits.)
To be fair to Mr. Welch, although GE performed at the 51st percentile between March 1981 and December 1992, it would have looked much better were the comparison to be controlled for difference in company size. In so doing, I found the higher the value of the company in March 1981, the lower the future shareholder return. If the regression trendline is read for GE's March 1981 market value of $15.3 billion, a normalized total return for GE would have been only 9.4% per year. From that standpoint, GE's actual 18.9% compounded annual total return looks heroic.
Still all this shows is that Mr. Welch is superb at running a big company. But it leaves unanswered the question of whether GE's shareholders would have been better off had Mr. Welch broken up his conglomerate, spinning off the pieces to them.
Critiquing his total compensation, mention also needs to be made of the squishiness of his restricted stock. Mr. Welch received a grant of restricted stock worth $7.8 million in 1992. But if GE's performance should head south, and if the value of the company's shares should drop in half, Mr. Welch still will end up carting away $3.9 million that he never should have earned.
It is also significant to observe that, in total current compensation (salary and bonus), Mr. Welch has never had a down year during his tenure as CEO. Would that same could be said for his company's stock price, which declined between the end of 1983 and 1984 and between the end of 1989 and 1990.
On top of all this huge pay, Mr. Welch also stands to benefit mightily when he retires. His pension will be around $2.3 million per year. That's a lot of money to pay someone to sit in a rocking chair and mutter disparaging remarks about one's successor.