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dismayed, and thought he had gone over to the dark side;  they took their business elsewhere,  but they seem to have been replaced by Journal readers who have found a new, organic soulmate in Mackey!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.

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2 Comments

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  1. Nice follow up and extension to Mackey’s blog David! As a UK based recruiter, I find it interesting in this post-recession era, that the new UK government has imposed limits on top civil servants pay of 20:1 of the lowest in their department. I think its one of a series of signs that the post-recession era comes with more morale obligation on the part of corporate executive life.

    But did we really need a recession to tell us that? Have we really lost that much touch with our fellow man? Yes, I conclude that we have, and the chance that we will – as a western society – go back there are real. You can see the faults of the next recession already being built in.

    With regards corporate morale future, then there is some hope with both more small businesses and more female owned/CEO’d businesses. You can not in a small business afford to disappoint employees: recruit is expensive and disruptive in that sector

  2. Thank you so much Ian and good to hear from you! Yes I too hope this period of recession will bring us to some soul searching about how greedy we can allow CEOs and others to be, at the expense of the morale of thousands of employees. This is not about stifling the capitalist drive to succeed or the entrepreneurial spirit. The latter deserve all they can get because they took the risk. But the professional manager, that’s a different animal. Often, like Carly Fiorina at HP, their “success” comes largely on the backs of those they outsourced.

    Then as you say there is the human thing: can’t we have a fairer system just because its the right thing to do? Or if that does not appeal, because it is the highest morale-driver “thing to do”! When I think of football, its all about performance, and that’s why we love it, but thats not true for some of these pay packages. Its a fixed game and we have to watch it in our organizations, often with little recourse. So maybe yes, the shame of it all, the public exposure of greed, the general realization that we can take back our organizations from these people, that might have a chance in these turbulent times.

    best to you, David

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