Excess: Byproduct of Fear
“They took so much that the owner noticed,” is a line from Nigerian novelist Chinua Achebe about corrupt politicians. But sadly and shamefully it now applies to top executives of U.S. companies.
Wretched excess in executive compensation has aroused shareholder objections--especially from major pension funds. And that has led to Congressional inquiries and pressure on the Securities and Exchange Commission to allow shareholders a vote on executive pay and perks--regarded until now as internal company business.
But pay has become everybody’s business, because excesses are undermining U.S. companies, costing jobs and causing trade deficits. Japan cited executive pay as a non-tariff barrier in recent U.S. trade negotiations, arguing that overpaid executives render American companies uncompetitive and lead to restrictions on Japanese imports. The Japanese reportedly were thinking specifically of loudmouth Lee Iacocca, the chairman of Chrysler who raised his pay again last year--to $4.3 million--even though company profits plummeted 78%.
But Iacocca is far from alone, as a glance at The Times’ Executive Pay lists makes clear. Even Forbes Magazine, a longtime defender of high pay for the brass, says now “It Doesn’t Make Sense.”
U.S. chief executives make more than double the annual salary of Japanese top executives and 68% more than German bosses. Put another way, U.S. top executives on average make more than 100 times the pay of the company’s lowest paid workers while in Japan the boss makes 17 times the lowest pay and in Germany and France top managing directors make 23 times the lowest pay.
Yet for the higher pay they have delivered failure. As the pay of top executives has gone up, profits have gone down; executive pay has beaten inflation by a wide margin while the pay of average workers has trailed inflation.
Truth is, top executives in U.S. business have become like the officers back in air-conditioned Saigon who so enraged Generals H. Norman Schwarzkopf and Colin L. Powell in the Vietnam War. Schwarzkopf and Powell saw those officers betraying the men who were out in the steaming and dangerous jungle. Just so, today’s U.S. company executives have betrayed the working people they were entrusted to lead.
The time for reform has come. It was in reaction to the disgrace of Vietnam that the competent and victorious military of Desert Storm was put together. Perhaps a similar transformation can occur in U.S. business.
But before real reform is possible, we should understand one reason for the hoglike swarm that executive compensation has become. Sure, there’s greed, and massive ego. But also there is fear--fear of losing jobs if earnings or stock performance lags.
An unhealthy tension has grown up in which corporate managers see pension fund shareholders as portfolio speculators, ready to sell out without notice. So managers, unlike ordinary workers, protect themselves with employment contracts guaranteeing golden parachutes if they lose the job and fat incentives if they merely keep the stock up.
Managers, in a word, write themselves insurance against risk. And the same risk-averse mentality carries over to business, says Lester Korn, founder of the consulting firm Korn/Ferry International, who has seen U.S. managers avoid overseas markets and long-term investment.
But enough of problems, what about solutions? As Congressman Mel Levine (D-Los Angeles) says, “No more prizes for predicting rain, prizes only for building arks.” Oddly enough, a first priority should be to reduce the fear. That’s right, reduce the fear and encourage long-term perspective.
Japan has never had any illusions about risk-taking, says Naohiro Amaya, former deputy Minister of International Trade and Industry and an architect of Japan’s postwar industrial policy. “Businessmen are risk averse,” says Amaya. “Research and development is necessary for the future, but it is a gamble that businessmen hesitate to take.” So the Japanese government removes the risk by supporting desired industries with bank loans, tax credits and, in many cases, protection.
A U.S. equivalent would be for pension fund shareholders to base executive compensation on long-term gains--in market share as well as profits. Campbell Soup, reports Forbes, now only grants bonuses based on the company’s market share performance. The view is that “we gain or lose market share as a total company, not as collection of individuals,” a spokeswoman says.
That’s right in line with the newest thinking about incentives, says William White, compensation director for Ernst & Young, the accounting firm. “Incentives must go bottom to top, throughout the company.”
There are companies where that happens. Motorola has an incentive program that can add 3% to 5% to everybody’s paycheck. Teams from each department set goals and plans, not only for cost or quality improvement but for everyday work done well, maintenance, delivery ahead of schedule and the like.
Worthington Steel of Columbus, Ohio, has profit sharing for all workers that can double their base pay in a good year. Lincoln Electric of Cleveland has an employee-elected advisory board and doesn’t hire executives from outside. It bases bonuses on productivity, and all employees share. Lincoln’s chairman makes just 11 times a line worker’s pay.
There’s a lot to be said for staying close to the troops. Gen. Powell makes $100,000 a year, less than 10 times the buck private’s pay. Powell, who last week was reappointed chairman of the Joint Chiefs of Staff, enjoys and deserves the respect of the American people.
Unfortunately, the same cannot be said for many of the nation’s top business executives.
