- Historic Sites
A rule of thumb on executives’ salaries: They aren’t overpaid if there’d be no company without them
September 1993 | Volume 44, Issue 5
If Rodney Dangerfield weren’t a comedian, he’d probably be an executive. They don’t get any respect either. Alexander Graham Bell invented the telephone and has, naturally, a long entry in the Encyclopedia Britannica and numerous cross-references. But his father-in-law, Gardiner Hubbard, who merely invented AT&T, made Bell by far the richest inventor of the nineteenth century, and gave the country a phone system that has been the envy of the world ever since, goes entirely unmentioned.
Even the government gets into the act. Recently, the Clinton administration proposed that executives be the sole job category in the United States that, in effect, is subject to government wage controls, by limiting the deductibility of executive salaries from corporate income taxes.
Now, certainly, some executives are overpaid, especially when the top management of a company controls the board of directors and the executives thus get to set their own salaries. But there are also overpaid movie stars and sports figures. Somewhere in the world there is probably an overpaid historian, although I’ve never met one.
But what’s a good executive worth? Well, sometimes he or she has been worth the whole company.
Henry Ford invented the mass-market automobile, and his engineering genius created both a great fortune and one of the world’s largest corporations. But toward the end of his life, his slapdash, highly idiosyncratic, and increasingly paranoiac approach to management went a long way toward wrecking both. Under Henry I, costs were estimated, to the extent they were estimated at all, by weighing piles of invoices. It was Henry Ford II—no genius, just a first-rate executive—who created the modern Ford Motor Company (1992 sales: $100 billion) out of the chaos left by his grandfather.
Or consider Sears, Roebuck. Having given their names to one of the most famous corporations in the world, both Richard Warren Sears and Alvah Curtis Roebuck are immortal. But it was the now nearly forgotten Julius Rosenwald who turned Sears, Roebuck from a shapeless, inefficient, rapidly expanding corporate mess into the retailing titan of much of the twentieth century. Indeed, there is probably nothing wrong with the modern-day Sears, Roebuck, that a modern-day Julius Rosenwald couldn’t fix, if only the company could find one.
Rosenwald was born in Springfield, Illinois, where his father managed a clothing store, in a house only a block away from Lincoln’s, in 1862. Leaving high school after two years, the young Rosenwald eventually moved to Chicago and opened a company that manufactured men’s summer wear in 1885. The company flourished from the start, but ten years later he sold out to purchase an interest in the even faster growing Sears, Roebuck.
Richard Sears, trained as a railroad telegrapher, had discovered he could sell in 1886, when he was twenty-three. A C.O.D. shipment of watches had been refused by a local jeweler in Redwood Falls, Minnesota, where Sears was agent for the Minneapolis and St. Louis Rail- road. Sears made a deal with the shipper and sold the watches himself. Soon he was ordering more and within six months, Sears had made five thousand dollars—no small sum in 1886: it was enough to buy a comfortable house.
He quit the railroad and set up the R. W. Sears Watch Company. When watches started coming back for repairs, he hired Roebuck, a self-taught watchmaker. Before long they were partners and selling jewelry as well as watches. Sears began issuing a catalogue and offering more merchandise.
It was soon obvious that Sears had a deep, intuitive feel for the commercial needs and aspirations of the people of rural America, and a genius for writing catalogue and advertising copy that awakened those needs and aspirations. The 1892 catalogue had 140 pages and offered everything from wagons to baby carriages, shotguns to saddles. Sales that year amounted to $276,980.
Over the next two years, in the teeth of the great depression of the early 189Os, the catalogue expanded to 507 pages, nearly all of it written by Sears himself, and sales to $393,323. But profits did not expand commensurately. Swift corporate growth is often a messy affair, and many promising concerns do not survive the economic equivalent of adolescence. Sears, Roebuck’s growth was messier than most, in no small part due to Richard Sears himself.
He was given to writing copy for merchandise he did not have in stock but which he thought might find a ready market. Being the genius he was, he was usually right.
Sometimes Sears got a bit carried away with his catalogue descriptions and strayed far beyond the literal truth. This, in turn, precipitated many returns of merchandise, always the greatest profit-gobbling threat to the mailorder business. Sears learned his lesson —in later years he was fond of saying that “honesty is the best policy; I know because I’ve tried it both ways”—but hyperbole was always to be his stock-in-trade.
It was all too much for Roebuck, who possessed the very quintessence of the bean-counter mentality. In what may well be the worst investment decision in the history of American capitalism, he sold his interest in Sears, Roebuck to his partner in 1894 for $25,000. (Years later, at the beginning of the Great Depression, Roebuck, by then broke, applied for a job at the company that had once been half his. Asked if he was any relation to the founder, he admitted he was the founder and was immediately hired for promotional purposes.)