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.

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3 Comments

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  1. Maybe I’m just speaking from my own experience, and what I’ve seen around me – but while the excessive pay of CEOs as a whole does make for decent fodder when getting into a lather of a rant, it doesn’t really trigger the ire of me or my co-workers on a personal level. Either it blends into the background of all senior executives getting overcompensated, or it is too far removed from our daily experience.

    What we end up bitching about at lunch is the lower level managers who we interact with everyday that do nothing but game the system for themselves. (caveat – while I might be close to the production floor, I am management myself). The HR manager who invites himself to every meeting if it means he gets a free lunch. The supervisor who apparently gets 12 weeks paid vacation a year judging by his attendance. The specialist who has three backups assigned to do his job, but who only actually does it himself if all the other three are out.

    Maybe the American fallacy of allowing those who have “made it” have their way in the mistaken belief that we ourselves are destined to “make it” eventually has something to do with it. But we seem to begrudge those at the top less than we do those who only think they are there already.

  2. Hi and thanks for such an interesting reply. My first reaction is this: what kind of internal culture allows such things to happen? I mean it sounds like people game the system, and no one stops them. Is that because that is condoned or modeled from on high? Like an unwritten value statement that says “I’m getting mine and I expect you to get yours any way you can”. If so, it comes back to my argument in the post: top management sets the tone and if that tone is to be selfish and greedy then others lower in the organization will first be demoralized but then they will do it too. Don’t forget, fish rot from the head down!

    Thanks again for the great examples.

    David

  3. During the 1990’s, CEO pay increased by 571 percent while the average worker’s pay grew by 37 percent. A typical Fortune 500 CEO makes more in one day than what a rank and file worker makes in a year. With CEO pay up sharply and the minimum wage falling farther and farther behind inflation, the average CEO’s compensation outstripped minimum wage pay by a ratio of 821 to 1 in 2005. According to Mishel (2006) at the current minimum wage it would take a full 52-week year of work to earn what the average CEO earned before lunch on the first day of the year. Bob Nardelli, former Home Depot CEO broke the record, in 2002. His salary was 1,458 times the average hourly Home Depot employee. However, in 2008, Lee Scott, the CEO of Wal Mart broke his record, by making more than 1,645 times what an average Wal-Mart worker earned in a year. The five highest-paid CEOs of public companies took home an astounding 9.8 percent of the aggregate earnings of those companies in 2005.
    Consider this: If the average workers salary had kept pace with the average CEO salary, the average workers salary in 2006 would be $110,136 and the minimum wage would be $23.00 an hour. Clearly, average pay has not kept pace. In 1999 a full-time phones sales associate at Quantas earned about $30,500 a year. The Quantas CEO earned about $1.9 million. In 2006, the same employee earned about $38,000, while the CEO earned about $5.3 million.

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