If you were writing a comic novel about the contradictions of 21st-century capitalism, you would be hard pressed to come up with a character as riveting as Marissa Mayer. Fortunately, reality did it for us.
Ms. Mayer walked away on Tuesday from her job as chief executive of Yahoo Inc. with a $23-million (U.S.) severance package. On top of that, her stock options, restricted stock units and current holdings of Yahoo stock amount to a little more than $236-million, according to CNN.
All in all, it constitutes an astonishingly rich reward for five years of bumbling ineffectuality and fading profits. But one of the most fascinating aspects of Ms. Mayer's big payday is how it also exposes a convenient cliché about executive compensation.
Consultants and directors are prone to defending lavish CEO pay by saying it's based on the executive's ability to create shareholder value. If a CEO presides over a rising share price, it's only fair that some comes back to her, or so the logic goes.
By that reasoning, Ms. Mayer would seem to deserve a big slice of the pie. From the day she took over the top job in 2012 until Tuesday, when Yahoo's core operating units were sold to Verizon Communications Inc., the company's stock price more than tripled, far outpacing the return on the S&P 500 and the S&P information technology index.
But things aren't quite as simple as they appear. The problem with looking at market returns is that Ms. Mayer had very little to do with Yahoo's soaring stock value. Under her watch, Yahoo's profits dwindled, from $3.31 a share in 2012 to a loss of 23 cents a share in 2016.
Her biggest single misstep was paying $1.1-billion to acquire Tumblr and then managing it into irrelevance, but there were lots of other pratfalls as well. They included lavishing money on ad guru Henrique de Castro, who was paid $109-million for 15 months of work, as well as an apparent inability to stop repeated data breaches.
So why did Yahoo's share price soar under her tenure? It was the result of two investments acquired under previous management – a 15-per-cent stake in Alibaba Group Holding Ltd., the Chinese online-commerce giant, and a 35.5-per-cent stake in joint venture Yahoo Japan. As those holdings swelled in value, so did Yahoo's share price. Ms. Mayer simply happened to be in the right place at the right time.
This raises what amounts to a theological question for contemporary capitalism: Should people be rewarded for being lucky?
It's a question that has always plagued those of us who care about executive compensation, especially in sectors such as mining, where a single, fortunate ore discovery can enrich an otherwise mediocre management team.
But it's a problem that has taken on new urgency in areas such as technology, where fortunes of amazing size can be created with astonishing rapidity, often based on factors that look downright whimsical. (Hands up everyone who knew – absolutely knew – that Snapchat was destined to be a $22-billion company based on a previously undetected demand for self-destructing videos.)
In an ideal world, corporate boards would keep a close eye on compensation to offset the distorting effects of luck and ensure that shareholders – not CEOs – get the biggest possible share of profits.
Unfortunately, that doesn't seem to be happening. "CEO pay grew an astounding 943 per cent over the past 37 years, greatly outpacing the growth in the cost of living, the productivity of the economy and the stock market," according to the Economic Policy Institute, a Washington think tank. So much for the notion that executive pay faithfully reflects corporate performance.
Cynics might say that the current situation is the best we can get in an imperfect world. But here's a modest prediction: If corporate boards don't bring compensation back into line with actual performance, the public pressure to raise taxes on companies and high earners is only going to grow.
After all, there's no good reason that Ms. Mayer – or Mr. de Castro, for that matter – should be able to achieve monumental wealth for accomplishing so little.
Ian McGugan