The Executive Pay Scandal -- Part 1

So, after a year or so of chin-wagging, rising unemployment, a trillion dollar bailout of the "banks too big to fail," we now have a sure sign of repentance from those very same problem-creators; bonuses even bigger than the ones that broke the bank(ing system) in the first place. You have to love these guys: they are so not getting it, but they certainly have world-class chutzpah.

With a straight face, they are now telling us that hundred-million dollar compensation packages are justified by their performance. After all, if it wasn't for them, their institutions might actually have failed. And though we're not just talking about CEO's, they certainly get the biggest checks, as usual. Why? Because they are held personally responsible for the actions that led to that performance. If they hadn't been there, stockholders, bondholders and everyone putting up the money (that's you, reader) would not have saved their jobs and/or lost their investments. Presumably, we should all be grateful.

But Maybe Not. Let's have a closer look, not just at the payouts but at the rationale underlying them. After all, these salaries and bonuses supposedly adhere to one of the most revered principles in management: people should get paid for their value. Their compensation should reflect their contribution to the organization's performance. If it does well, the people who made it happen do well. How American is that!

Well, let's see. We need to peel the onion a bit to see who or what is actually responsible for an organization's performance, and how much of a bonus seems appropriate. If we assume that the distribution of bonus monies reflects the accepted view, we have to conclude that the CEO was by far the single most important contributor. CEO's, for example, get the biggest slice and compensation drops off very sharply after that. So she is held to be largely responsible for success.

As to the second issue, how much is a very successful CEO worth, their current pay is now about three times larger than it was a decade or so ago. In 2005, CEO's of Fortune 500 companies got total compensation, including bonuses, that was 465 (not a typo) times as much as their average worker. Ten years earlier, that ratio was about 168: ten years before that (1985) the figure was 67. By the way, the ratios for other industrialized countries in 2005 ranged between 22 (Japan) and about 40 (UK) and they have risen much more slowly. It's easy to argue with these specific figures, but by any measure, CEO's in the USA get paid hugely well, and it gets even better from year to year, both in absolute terms and as compared to company performance.

So, as this has become widely recognized, a pay czar has been appointed and given the power to adjust the pay of the top 25 executives in companies that are operating with the help of a federal bailout. What should he do? Does this make sense or might there be a better way? Faithful readers (there are a few) will be certain that I will at least suggest one. They're right. Tune in for Part 2 and see.

He's got to be kidding!

The New York Times of Thursday, October 8, 2009, contains a jaw-dropping story about General Motors, whose sins, you may recall, included losing money from every orifice, paying no attention whatever to their problems and persisting in the behavior that got them in the soup to start with. There was, for example, the great private jet show, alerting the entire world to GM's sensitivity to the public and its clear appreciation of their situation.

Times have now moved on, as they have a way of doing, but Fritz Henderson, the new CEO, whose resume looks tailor-made for the job, appears to have been hypnotized by the environment on GM's top executive redoubt (which used to be on the 14th floor, well insulated from the rest of the company), into making yet another public statement that he will probably live to regret. He said, and I am quoting from the Times, "a new product-oriented culture has been put in place," and that GM's new board was "pushing management to speed up decisions on new products" and best of all, planning to "install a culture devoted to pleasing customers."

I love that last part. I can see Fritz or one of his many assistants going to the web and googling "install a new culture" as if it were an off-the-shelf item that, if the price was right and one was in stock, could be shipped by express, so as to ensure that the new culture was pleasing customers starting on the very next Monday mornng. My faithful readers -- both of them -- may know that changing the culture of large organizations is not a task to be undertaken lightly, since it has a solid history of failure. And come to think of it, what do we imagine GM was doing in the last decade or so -- fiddling while the company burned?

But, I hear you say, maybe this time they've learned their lessons and they'll really get down to it. But I say, Maybe Not. This is all too likely to be the next in a series of brilliant illustrations of executive intelligence, such as dissing the hybrids until long after they were successful, dissing the unions after sweet-talking them for 40 years (remember Tarrytown, anyone?) and dissing shareholders, who watched in horror as the company slid down the chute into bankruptcy. But, you say, they're much smaller and more nimble now; they "only" have 280,000 employees instead of 540,000 (in 1955). Well, then, I guess that's alright. Ha!