Let’s Be Clear: Executive Compensation Excess is Eroding Employee Morale and Engagement

(This is Part 2 of a three part series on executive compensation and morale).

Earth to CEOs:  Come Back Down Here with Us!

First a disclaimer:   this post is about a sub-set of CEOs, not all.  I am a business psychologist trained in social science research and understand full well that samples should not be generalized to the whole unless they are truly representative.   Many CEOs (and I have worked with a lot), are downright great people, generous, caring, and absolutely dedicated to the welfare of their workforce.  They dont have an ounce of greed in their bodies and they make sure they play by the same rules as those who work for them.   Perhaps you work for one of these people, or are one of them yourself.  This post is not about them/you!   This is a about a subset, enough of a group to make a difference in overall averages, and this subset has a mentality which is damaging US competitiveness.

I’ve been watching this new show on TV here in the US:  Undercover Boss.  Its about a CEO or COO going out in disguise and taking on some of the more difficult jobs which his (so far, all male) own people have to do.   In some cases he is so useless and the job so difficult, he gets fired after one day!  The show seems to be popular, partly because the CEOs have been humiliated.   Its also because most have so far reacted to this experience and shock at what people “out there” in the companies actually have to do, with genuine humility, often being really moved by the experience.  They are often moved enough to make changes, to promote lucky ones they come across, give raises, special gifts, etc.  Even to re-think the whole way their company does business.  I was thinking about all of this in the context of what we have been through in the last 2-3 years.  Is this the start of a trend?  Will we start to see a more real, personal CEO whose eyes are more open to what his or her people have to face every day?  Will that start to change the behavior of said CEOs?  Particularly in the area of compensation.  I know some of you are saying, dream on!  But I have a compelling reason for them to change, as you will see.

My hope is that we will indeed look back one day at this Great Recession and say, yes that was the time when we dumped this whole fad of glorifying some CEOs and brought them back down to reality.  Reality is that too many CEOs (usually, but not always men) were not all that their publicity machine puffed them up to be, but were paid as if they were.  I’m not talking about the Steve Jobs and Sergey Brins, the geniuses who founded the now-iconic companies which they lead and who deserve every bit of positive press (and dollar) they get;  I’m not talking about the hundreds of thousands of less well-known entrepreneurs who risk everything for their dream.  I’m talking about a different animal here:   the hired hands brought in as CEO.   They came in with a big blaze of publicity and then often had…mixed results.  I’m thinking of Bob Nardelli at Home Depot, Carly Fiorina at Hewlett-Packard and quite a few others.  Their Boards were acquiescent to the point of giving them a contract which no average worker could receive:  a fail-safe golden parachute which translated into “you win, you win; you fail, you win”.   Of course that is exactly what happened in my two examples; under Nardelli,  HD stock went DOWN by 8% in an up market but he made $240 in total compensation from December 2000 until his exit in January 2007.   His exit package was an additional $210 million.  That’s right, two hundred ten million dollars.  Under Fiorina, HP stock also went down, listen to Wikipedia’s summary:

“When Fiorina became CEO in July, 1999, HP’s stock price was $52 per share, and when she left 5 years later in February, 2005, it was $21 per share—a loss of over 60% of the stock’s value.  During this same time period, HP competitor Dell’s stock price increased from $37 to $40 per share.”

For this remarkable performance, a 60% drop in share price, her exit package was $42 million.  At GM, Rick Wagoner’s planned $20 million pension was interrupted by the company’s bankruptcy;  his contribution to GM’s performance resulted in a drop of 96% in the stock price under his tenure.   Even Jack Welch, once untouchable as the glorified CEO of the American giant, GE, totally screwed up his image with his outrageous $8 million/year retirement package which even included flowers in numerous luxury residences.  This was only brought to light by his divorce, and created such an uproar that even the SEC got involved with GE and poor Welch was shamed into giving a big part of it back, mumbling that it was important to “manage perceptions”.  Thats right, perceptions, forget about values, right?  Apparently it wasn’t enough that he left GE with $880 million in stock…..

Now we see the public mood swinging heavily against such excesses:  no longer able to tap rising house values, and more scared of facing unemployment, if not already there, the view from Main Street towards the corporate world’s rigged compensation game is decidedly sour.  Who can blame people, when their taxes are being used to bail out some of those who are the main perpetrators?  Unfortunately, the heavy hand of government is starting to be used to fix things, as in an ominous sounding “special master” for compensation installed by the Obama administration.

If this sounds like I am pessimistic, I do not mean it to: as a result of this orgy of excess, the most recent wave of which perhaps Welch set off as early as 2002 and which culminated in this recession, I have a more optimistic outlook.  Maybe we can celebrate that this era might be coming to a close.  It’s certainly time that it did.  The US cannot continue to be the only country in the world where the CEO pay to average worker is 300-400:1, and where golden parachutes give CEOs advantages which none of their fellow employees receive.  In other countries, including those which are extremely competitive with this one, the averages are closer to 25:1.  It is my opinion, based on quite a bit of research, that CEO pay excesses are eroding morale and engagement in the United States.  Why do I think that? 

–First because its plain old common sense that if you run a company and your pay is so far off that of your co-workers, you have already “disengaged” yourself from them in a major way.  Don’t then pretend that you can have an engaged workforce when you yourself have made that less possible by accepting, even demanding something which none of your co-workers could ever receive.  Play the game on the same field and with the same rules as those you work with:   then you will have a chance to really engage everyone.

– Second, and very tellingly, the US is far, far from top dog in the morale world.  It is average at best (see Mercer’s website for worldwide employee engagement data).  How can this be when almost everyone who lives here says it’s the best place in the world to live?  (Some Norwegians, Dutch and Danes might disagree…but stay with me here).  So yes it might be the best place to live, but…..not the best place to WORK.  Part of the reason for that is…excess, and lets say the G word, Greed at the top.  Anyone who has spent as much time as I have (25 years) interviewing thousands of people at work and surveying hundreds of thousands, will tell you:  excesses at the top infuriate otherwise even-tempered employees.   They cannot understand why they have to play by the rules but top management does not;   they resent special “executive” dining rooms, special parking (GM at its peak had a heated parking garage with special elevator for the poor executives who could not stand the cold Detroit winters); employees  boil over when these individuals then come onto to the Intranet with a special message for the “troops” saying, “we’re all in this together”.  “No we’re not”, they say.  “You are on another planet”, Mr/Ms CEO.

Smart companies with smart and more reasonable CEOs understand this, in the US and elsewhere.  John Mackey of Whole Foods, someone for whom I have a great deal of respect..and not just for his views on compensation…is a good example.   At Whole Foods no one is paid more than 19 times that of the average worker. Munich-based BMW last year also became the first big company in Germany to implement bonuses based on reasonable ratios compared to the average worker’s bonus.  The company spokesman was quoted as saying “We don’t just want to build sustainable cars. We also want to have sustainable personnel politics. We think this is good for the company culture”.  Ahh how refreshing that he places personal, selfish interests lower than that of a sustainable culture for his workforce.   Is this one of the reasons why BMW has, and continues to make, such great cars?  I think so.

Will the intense pressure which comes with such a recession, which we still seem to be in, make diamonds out of coal?  I hope so.  I hope that public opinion, and yes even outrage, will shame those who are greedy into more reasonable behavior.  Lets be clear here:  I am not talking about more government regulation, salary caps, etc!  I hope that increasing understanding of the importance of employee morale/engagement as a performance driver will convince Boards, shareholders and CEOs that it is in the interest of their organizations that these baser instincts of the human spirit are tamed.  Boards especially need some backbone and certain other body parts which I wont mention here.  They need to stand up to these demands, refuse to buy the “arms race argument” that “the other guy is making this much”, and make a stand for something new.  Its 2010, and it’s not “me” any more, it’s “we”.  China, India and Brazil are already going down this road;  their worker morale is far ahead of that of the US or Europe.  Will we let them take away one of the few real advantages remaining to us by not facing up to those who would erode it in our organizations by their own selfishness?  I certainly don’t think we should.  Our future standard of living might depend on it.

Happiness at Work II: More Thoughts

I find this subject quite fascinating and judging by traffic here on the blog, more than a few of you do too.  Reactions to the original articles by Sue Shellenbarger in the WSJ (see my Happiness at Work I post) have also been interesting, ranging from those who say that this is fabulous, to those who seem to think this is the typical work of manipulative, scheming management out to exploit the workforce with a cynical appeal to something which appears (on the outside) so kind.  In other words, its a lot like the reaction I get when I tell people I work in the area of morale at work;  most people beg me to come to their workplace as soon as possible, but some (especially in Europe which is very interesting and the subject of a future post here) think this whole morale/engagement thing has the purpose of driving the enslaved workers even harder.

I wrote to Sue and also posted a reply to the article online at the WSJ and wanted to share one of these with you, at the risk of a little overlap with my first post on this subject.  Basically I said that happiness is fine, trying to bring something positive like that to the workplace can’t be all bad, but that it might have limited effect, based on how dysfunctional the internal culture is.  Here is what I wrote to WSJ reporter Sue Shellenbarger:

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Sue your recent work on happiness at work is very interesting,  but I have a few issues with it:

– if I overlay the world’s happiest nations like Denmark, Holland, etc. on a chart of the countries with the world’s highest workplace morale (currently China, India, Brazil), there is not much overlap. Why is this?  Maybe because workplace morale has to do with a lot more than being happy. Happiness might want you to relax or take the day off and go to the beach;  high morale and its resulting behavioral component, engagement, make you want to contribute, go the extra mile, tell others about how great your company is as a place to work or buy from, etc.

–its all very well to encourage people to take a positive view but that is not always easy.  Even Eckhart Tolle (whom I love, thanks for the reference to him!) suggests that quite a few situations require us to get out.  Lets imagine an employee furious that his CEO makes 300-400 times his pay and benefits (the US average, far far above worldwide figures) and has a golden parachute if he screws up (a la Nardelli at Home Depot), something this employee would never been offered.  Rick Wagoner at GM destroyed 96% of the GM share value during his tenure and barring bankruptcy was set to receive a nice $20 million retirement package. Should HD and GM people be “happy” about this?

–there is plenty of evidence that high morale and engagement is a strong correlate and driver of performance, and some of the studies you mention note that happy people perform better, but that happiness might be part of their overall morale, but only a part.  They didn’t get to that high morale just by learning to be happy, they got there also because management treated them well, gave them power to make decisions, a chance to grow on the job and many many other things.  Put a “happy” person in with the boss from hell for a few months and lets see what happens….

I am all for people taking responsibility for their own well being;  but we also need to shake up management in this country and improve our pitiful standing in the morale sweepstakes: Gallup says only 29% of US employees are engaged at work, and Mercer has us at below average worldwide in engagement.  In an increasingly competitive world, with all the performance benefits of high morale that we now know about, we cannot afford to stay here!

Anyway, great discussion and thanks for the chance to contribute.   FYI my philosophy is strongly capitalist and not pro government intervention, but mindful that, like football, we need clear rules and enforcement of them to ensure fairness.  Kind of like John Mackey, of whom I am a big fan.

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Lots of people writing to the WSJ wanted a job as a happiness coach, they think it is like going to a workplace with a bunch of drinks and having an instant “five o’clock somewhere” Happy Hour!  Would that it were so simple, right?  I’ll stick with my position that learning about oneself and learning to be happy is a huge part of life, and as valuable a resource for dealing with life’s ups and downs as anything I know.  Everyone should try and find a way to do this, and if they did we would have a better world.  But there is more to organizational culture and the building of high morale than this and we need to be careful that people don’t hang on to this as a superficial “fix”, especially in difficult times.  Don’t forget what I told Sue:  the “happiest” people in the world DO NOT have the highest morale at work.

Let me know what you think!

Executive Compensation and Worker Morale I: The John Mackey Blog

Back in June of last year John Mackey, CEO of Whole Foods Market, an organic grocer headquartered in Austin, Texas, wrote a piece on the Harvard Business Review Blog about excesses in executive compensation and the effect these had on worker morale, among other things.  It was titled “Why Sky-High CEO Pay Is Bad Business”, is a great read, and can be seen here:

http://blogs.hbr.org/hbr/how-to-fix-executive-pay/2009/06/why-high-ceo-pay-is-bad-business.html

Mackey is an interesting character, having started this business 30 years ago and made a huge success of it (WFMI is the largest such merchant in the world, with stores in the US, Canada and the UK).  Lately he has become somewhat of a darling of the very people you might not associate with Whole Foods and its tree-hugging image:   readers of the Wall Street Journal.  The reason for this was his 2009 op-ed piece written about the Obama health care plan and how he, Mackey, felt that such a plan was too much government and too little common-sense actions which he and his company had already taken to provide cost effective health care to all his employees (or “Team Members”, as Whole Foods calls them).  The Journal had such a huge positive response to this that they interviewed him a few weeks later, further burnishing his image.  Some on the left side of the political spectrum, WF customers, were dismayed, and thought he had gone over to the dark side;  they took their business elsewhere,  but they seem to have been replaced by Journal readers who have found a new, organic soulmate in Mackey!

I was inspired by his Harvard blog to the point that I wanted to add my two cents and thought this would be worth bringing also to this venue.  Here is what I posted in reply:

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I think this is as timely and well informed a discussion as I have seen anywhere on this subject. As someone who has a great deal of respect for John Mackey and who spent two years living in Austin and using his flagship store there almost as an office while researching my recent book (co-authored with Prof. Cary Cooper) on morale and performance, I had a chance to see the result of his management style and philosophy in action. I can say from that experience, as well at some of his other stores, that Whole Foods has a very high level of morale and that Mackey and his company live what he talks about here.  Not only that but Mackey’s recent offerings in this area and worker health care, for example in the Wall Street Journal, always use common sense practices instead of government regulation as their proposed approach.

The evidence for the corrosive effect of high executive compensation on morale may only be anecdotal but there is one related piece of data I can point out: the US has, at best, average worker morale on a worldwide basis. I observed this during 25 years of consulting around the world in this field, and Mercer’s recent data confirm it.  Not only that but our emerging competitors, India and China, are now way ahead in the morale stakes.  Gallup confirms that only a pitiful 29% of US employees are “engaged” at work (engagement being a behavioral by-product of high morale).  While this could be brushed off by those ignorant about morale’s effect on performance, or put down as something “touchy-feely” or “soft”, well informed managers now know that morale’s importance is far more than this, and is in fact “mission critical”.  The military has known this for years, but unfortunately the value of this information has taken a long time to reach some management ranks.  As my book shows, the evidence for morale not only correlating with but driving performance, is overwhelming; this includes such areas as profitability, productivity, customer satisfaction and even employee health.  Some here have also rightly mentioned that execution is the key to organizational performance, not just the underlying strategy: well, morale is one key measure of the shape an organization is in, as it prepares to execute its strategy.

Anyone who has done employee surveys or run focus groups will tell you that employees complain a lot about executive compensation. They roll their eyes when the CEO gets on a video presentation and tells them “we’re all in this together”, knowing that his 300:1 or greater compensation level belies that statement and puts him on another planet compared to the average worker.

One word which drives morale more than any other is “fairness”.  This does not mean French-style equality or any form of socialism, it is quite different. Fairness can mean a significantly different compensation level for two people in an organization, but based on job size and complexity, performance on the job, etc.  But when workers see someone at the top drain shareholder value to the extent of a Rick Wagoner at GM (96% drop in share price during his tenure), and the rewards which are given to those people even when they screw up so badly (Home Depot and HP also come to mind here for previous CEOs), no wonder they become cynical, and yes, de-moralized.  What would have happened to a GM worker in a paint shop whose work had a 96% defect rate?  Continued employment and a great retirement package?  I don’t think so. Nothing about this is fair, it is a game which is fixed so that some CEOs can win no matter the final score, and this is allowed to happen by too many passive and overlapping Boards and disenfranchised and apathetic shareholders.

We therefore know three things: 1) our morale is anything from really quite low (29% engaged) to average at best; 2) we have practices of excess and greed in the executive suite which we know from experience de-moralize our people; and 3) our emerging competition is kicking our behind in the morale stakes and this will bring them enormous competitive advantages over us unless we get our act together.  So we (not the government!) need to wake up and realize, we are in a fight for our standard of living and way of life here; lets get these excesses under control, and lets get our morale up to the world class level which it deserves to be, given the unbridled optimism and energy of the American people.  Yes that’s the same America whose early states used the word “Commonwealth”, with all that that means.  It means fairness.

Welcome to the Morale/Engagement and Performance Blog

Hello I’m David Bowles and I want to welcome you to my blog on morale/engagement and performance, the theme of a book published worldwide by Palgrave-Macmillan (see tabs above and picture below), which I co-authored with Professor Cary Cooper.  Instead of just focusing in the book on “what to do on Monday morning” to improve morale and engagement, Cary and I have looked in depth at the performance connections with morale…the things which are the answer to the question: “why should I care about this touchy-feely stuff”?  As we say in the book, performance is the reason why you should care and why organizations large and small are making morale and engagement “mission critical”.  I look forward to sharing with you here the research-based data we feature in the book and discussing your reactions to, and experience with, what I have to say.  Whether you are interested in productivity, profitability, customer satisfaction, worker health or innovation…all are affected by, and our data show, driven by, high morale and engagement.  Coming at a time of unprecedented stress and upheaval in organizational life, the drive towards high morale and the workforce engagement which results from it, can be our way towards success in the tough, globalized world which is our future.  I look forward to sharing this journey with you and hope you will contribute your ideas and thoughts.

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