Friday, November 03, 2006

Grotesque Thoughts on Grotesque Pay

In 1970, the ratio between CEO pay and regular-Joe pay was 28 to 1. Today, the average annual CEO pay ($10.5 million) is nearly 400 times that of the average employee’s pay ($28.5 thousand). The main reason that this ratio is disgraceful is not because of the vast disparity per se, but because so many CEOs’ performance is awful and they still make out like bandits. Few people begrudge the mega-compensation of Bill Gates and Michael Dell because those two built their companies (Microsoft and Dell) from scratch and created vast sums of wealth for so many employees and shareholders. Few people begrudge the mega-compensation of Steve Jobs and Carlos Ghosn because those two turned around their companies (Apple and Nissan) so dramatically.

The moral tragedy occurs when so many CEO’s who aren’t entrepreneurs, but themselves basically employees of the company (sometimes diplomatically called “professional managers”), wind up with millions every year even while their companies’ stock, performance, and morale sags and plummets.. Even when (or if) these poorly performing employees eventually get booted for ineptly diluting market caps and brands (like ex-CEO's David Pottruck of Schwab or Carly Fiorina of HP), they still walk away with literally tens of millions of dollars. How’s that for punishment? Or if that sticks in your craw, consider William McGuire, who was basically forced out of his CEO position because of some creative accounting irregularities, and walked away with a punishment of over $1 billion. Is there something wrong with this picture?

A recent BusinessWeek article lamented the accelerating exodus of CEO’s. In 2005, a record 1,322 CEO’s left their firms under duress. The track record of 2006 is on pace to exceed that number. BusinessWeek admits that “it’s hard to feel sorry for CEO’s when they take home at least 300 times what the average worker makes each year”.

Know what I think? These two disturbing trends—accelerating pay disparities and accelerating CEO exoduses—are becoming increasingly intertwined. In response to the growing pressures of today’s uber-competitive marketplace, many companies and investors are forgetting the concept of “patient capital”. They expect and demand fast results. CEO’s, therefore, are now demanding ever higher pay to buffer themselves from the consequences of failure and dismissal; in fact, they’re negotiating contracts that provide them with explicitly enormous sums of money in the event that they do fail. (Check out Robert Nardelli’s obscene contract at Home Depot; apart from his mind-numbing compensation while Home Depot continues to lag below expectations, some analysts who have examined his contract have suggested that he’d be even better off if he was booted out for lousy performance than if he actually succeeded).

Further, many CEO’s in this “hurry up and succeed” environment make myopic, self-serving decisions that ultimately wind up hurting rather than helping their organizations. And as I’ve shown in some of my prior articles and books, CEO’s whose primary focus is on pleasing investors and their boards are less likely to produce sustainable and sound financials than are the CEO’s whose primary focus is on pleasing customers and employees.

There are plenty of CEO’s who refuse to play the “quick fix” game, and who refuse to grotesquely fatten their pay packages regardless of the status of corporate performance and espirit d’corps. CEO’s like John Mackey and John White have founded and guided their companies (Whole Foods Markets and Public Financial Management) to steady, employee-driven, profitable growth for years and they take home annual pay that is less than 30 times that of their average front-line employee’s.

But overall, the problems still exists. And they seem to be getting worse. Jack Welch says the way to fix things t is for boards to start acting responsibly when they negotiate CEO pay packages. Okay, let’s start holding some feet to the fire.


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