What’s Wrong With A Company Paying for a CEO’s Family to Fly?

Dave Hoffman

Dave Hoffman is the Murray Shusterman Professor of Transactional and Business Law at Temple Law School. He specializes in law and psychology, contracts, and quantitative analysis of civil procedure. He currently teaches contracts, civil procedure, corporations, and law and economics.

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3 Responses

  1. A.J. Sutter says:

    Seems to me that a fly in the ointment is the assertion that such a practice “maximizes shareholder wealth” (even assuming, for the nonce, that such maximization is attainable and is adequate justification for anything). How can you demonstrate that a particular CEO is necessary for maximizing shareholder wealth? Even if that person has the skillset, how can you demonstrate that the person will deploy that skillset in a profit maximizing way whilst flying all over heck? How can you even show that expanding the hiring pool to commuters is necessary for wealth maximization? These issues are highly multivariate, and one can’t do a controlled experiment.

    Suppose we compare three CEOs — call them P, Q,and R — one of whom (P) lives with family near company HQ, one (Q) who commutes but is able spend most of his or her time with family (such as due to family’s flying back and forth), and one who commutes but is apart from his or her family (R). The conventional wisdom seems to be that P ≥ Q > R, when it comes to CEO performance (which, in turn, is measured by “shareholder wealth,” which in turn is usually measured by share price or by net income). Let’s also suppose this wisdom could be supported by statistical evidence based on studies of populations of CEOs (has it been?). Then that would simply be evidence of a correlation, not causation. For example, a company that chose to hire a commuting CEO but that couldn’t afford to accommodate his family (or thought it might be improper to do so) might have many other problems with its financial condition, or with the quality of its Board’s judgment, that could affect performance. (Here I’m also assuming for sake of argument that if share price is the metric of performance, that such price is in fact affected by such “fundamentals”).

    Moreover, by hypothesis there is some individual Q for whom Q > P, given the pool of available candidates. How can this be known in advance? It can’t. How can it be known in retrospect? Again, it can’t, because you don’t know how any of the local candidates would have performed if you had hired them. And also because, albeit that CEOs like to claim credit for company performance, this is again too multivariate a problem for causation to be attributed reliably.

    I suspect that hiring Q might be justified by (i) showing that statistically, there isn’t much difference between hiring resident and contented commuter CEOs (again, I’m assuming this for the sake of argument), and (ii) claiming that this particular Q is, in the Board’s judgment, the best candidate for the job, and is worth the extra money. The company’s PR folks should be able to put the best spin on the explanation, e.g. that family has commitments in their original home location. (If the new CEO is worried for his own sake that these disclosures might tank the value of his shares, then I suspect there will be a lot of other ethical baggage he is shlepping with him into the new position.) The Board might claim that their decision is *intended* to be wealth-maximizing, but they could not demonstrate that it is wealth-maximizing in fact. Nor is this likely to be the best rhetorical approach for them to take if they want to minimize adverse shareholder reaction to their business judgment.

    You may be right that no one cares much about the family flying back and forth. But especially as someone who takes an empirical approach to the study of law and economics, you might show more care before making a casual assertion of wealth maximization. That seems more like ideology than empiricism.

  2. Dave! says:

    On one hand, I don’t have a problem with the practice, so long as it is disclosed… I think you are right that it may be a good recruiting tool for top executive talent.

    That said… there are legitimate criticisms of the practice. Yes, if asked to pay for something like that out of pocket, the likely result would just be additional CEO compensation, but there are other leadership implications.

    First, many other extremely valuable employees aren’t given a similar option. Many valued employees are expected to relocate–and given relocation assistance that doesn’t include private jet access. They have to weigh the impact of relocation on their families. Their families have to deal with relocation. They are often expected to make that sacrifice for their employer and/or career.

    We should expect nothing less from corporate leadership. That’s what *leadership* is. If the family sacrifices are too great, that should be a strong indicator that they are not right for the position or that the position is not right for them.

  3. jodi says:

    I don’t claim to know a whole lot about the “business” end of this whole plane thing with Ed Mueller (Qwest) but as a Qwest employee, I do have an opinion. I’m “just” a phone operator here in Minnesota, have been for 10 years, one of the most bottom rungs of the Qwest payscale. In our most recent contract, (right after Ed took over), we received ZERO raise for an upcoming 3 year period. ZERO, not one DIME! for 3 years, while his daughter uses the private jet! and I thought Joe (Naccio) was the only crook!