Marissa Mayer has been installed as Yahoo’s chief executive for some three months and while it’s not yet clear whether she will be able to revive the once hot Internet company, it is crystal clear why Yahoo’s directors agreed to her massive pay package.
Mayer, already wealthy at age 37 from her Google days, got some $117 million to be earned over five years through a combination of salary, bonus and various stock awards. That’s about $45 million more than former CEO Scott Thompson, age 54, would have gotten had he stayed for five years instead of four months.
Thompson, let’s remember, didn’t leave because he did a bad job; as a former PayPal president, he had been hired as the new golden boy. Rather, he quit before he could be fired after it emerged that his résumé had falsely claimed he had a computer science degree as well as one in accounting.
And that’s the whole point. What matters more in today’s managerial marketplace is not your experience or your actual accomplishments, but your reputation. In a 2007 academic paper from Northwestern University’s Kellogg School of Management, “Organizational Form and the Market for Talent,” associate professor of managerial economics Bard Harstad, a Norwegian, argues that superstar pay in today’s CEO market is the result of outsized reputations gained by certain executives. His line of reasoning helps explain how Mayer became the youngest CEO of a Fortune 500 company and one of the highest paid.
Companies pay for what they think a manager is worth, but finding that out is pretty tough. In a big company, you’re lost among many. It’s difficult from the outside to determine who can rightly claim success.
That’s not the same for small firms like tech startups where only a few people run the firm and everyone, inside and out, knows who they are. The easiest way to maximize your reputation—and thus your future pay—is to join a small company early in your career. If that company is successful, you are more likely to be credited for that success and recognized outside the firm. “If you work in a small company, it’s more transparent to detect who has done what, so it’s easier for the market to recognize talent,” said Harstad in a phone interview from Oslo.
Knowing this, young people will accept lower pay to work for, say, a tech startup, than for a larger firm, like, say, Microsoft or Intel. Moreover, when the market is very competitive, as the tech industry is, companies are more likely to outbid for known reputations that they believe can contribute to their ability to gain profits and market share.
Mayer has so far played her own career perfectly. She went to Stanford University, a brand-name institution, and became Google’s 20th employee and its first female engineer. Google then became wildly successful, further enhancing her reputation. Her own talents were highly visible to the outside market because she claimed responsibility for Google’s most public asset, its home page.
Even after Google became a company of more than 53,000 employees and her position became less critical, she remained very available to the press, allowing information about her reputation to be wildly circulated and further enhanced. She thus became perceived as a “superstar” talent, able to command compensation more usually associated with rock stars.
And it won’t matter if she completely fails in the new job. The market for managers rewards success at a much higher level than it penalizes failure. “The downside risk is much less than the upside risk in reputation building,” said Harstad.
Which is good news for Thompson; he is currently rebuilding his own reputation as the CEO of Shoprunner, an online-shopping startup based in Philadelphia.