Saturday, May 14, 2011

The Wide Gap

Blink:

Recent headline: Jobs Data Brighten U.S. Economic Outlook. The Labor Department reported 244,000 jobs were added in April, above expectations given March’s gain (221,000), but unemployment crept up to 9.0% from 8.8%. I am confused, especially when I examine the disparity in corporate compensation (a.k.a. The Wide Gap).

Read On:

Occupants of the corner offices are rolling in dough again. After experiencing shrinkage during the recession, according to a study of 200 major companies conducted for the New York Times by a compensation consulting firm, the median pay for the top executives was $9.6 million. This represents a 12 percent increase over 2009 for chief executives. Actually, U.S. businesses are swimming in cash which I first addressed in my January post Shift Happens. In the fourth quarter of 2010 profits were up 29.2 percent, the fastest growth in 60 years – U.S. businesses reported profit at an annual rate of $1.68 trillion.

Consequently why the paradox? The recovery has not trickled down. Unemployment remains high and those that are gainfully employed are still struggling to hang on to their homes and jobs. Recent efforts under the Dodd-Frank financial regulations that empower shareholders has done little to curtail top executive compensation. Leading analysts doubt we will witness any major changes in the near future during proxy season as long as the market continues to perform.

I understand that executives of the corner offices assume the burden of responsibility for making their company successful for their employees, shareholders, customers, suppliers, etc. However, recently I learned that the IPS (Institute for Policy Studies) reported that leading corporations pay their top executives 300 plus times more than what the average American earns. I remember reading Peter Drucker, the father of modern management science indicating that companies should not compensate at more than 20 to 25 times what their workers receive. He believed that widening the gap beyond that would make it difficult to foster the teamwork needed to make a company successful. A controversial stance, but he firmly believed corporate leaders should do what is right for their enterprise first, not for their shareholders alone, and certainly not for themselves. To quote Drucker: “When CEOs pocket huge sums while laying off workers, that kind of action is morally unforgiveable.”

The reality is executive pay packages are soaring and we will continue to experience the Wide Gap. This morning’s query: If we were to put a ceiling on the corner office compensation, say 50 times, twice the rate Drucker proposed, how many more jobs could efficiently be added into the system? What do you think?

6 comments:

  1. I've often considered this argument. If that were the case, I imagine there would be little trouble with minimum wages. If a CEO's salary max depends on the salary his janitor or factory worker receives, I bet we would see different behavior. It's a shame that there is such rampant abuse that we even have these conversions.

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  2. I don't think the issue is MORE workers, but more effective and passionate workers. So perhaps you can pay the performers more for their worth.

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  3. Although I basically agree with your general point that CEO compensation is out of control, your comment about jobs is confusing. Jobs are not created in a vacuum, but as a reaction to demand (or as an investment, as in R&D). There is no doubt that breaking the ridiculous pay policies would help provide funding for additional jobs, the reality is that right now companies already HAVE huge cash positions and have not added many jobs. CEO pay issues are a direct result of the loss of proper governance by today's boards. Filled with cronies, and outrageously compensated, they have approved anything put before them. Outside of profit, big business has lost its way.

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  4. Thank you everyone. I apologize for not being clear re: jobs. Job creation is needed for innovation which I think Corporate America is lagging in, but I also believe we also need to put some fat back in the system because the current workforce has been stretched to the max and is stressed out. Consequently I am beginning to witness some inefficient tendencies.

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  5. What and where is the Tea Party equivalent of Shareholder America? With pensions, 401-K's and IRA's a very high percentage of Americans are invested in the stock market and are therefore shareholders of these corporate entities. Unfortunately, most investors are so removed from their portfolios they probably can't name the companies with which they're invested let alone hold the Boards of Directors and Executive Teams of these companies accountable. The corporate issues are very complex--too complex for the average investor--and that's what Congress and most Corporate Leaders count on. The bottom line is we get what we pay for and we get the government we deserve. Unless we, the people, really "engage" this immoral system will perpetuate.

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  6. Jimmy,

    Good post!

    Two comments.

    1. Regarding the obscene pay packages being given to CEOs by spineless Boards...tax them at a 50% or higher rate as they do in GB. This should help reduce the debt. You can find more about this continuing arrogant attitude here: http://cdiamico.blogspot.com/2011/04/narrowing-debate-on-national-debt-and.html, which tracks the gap from 1960 to the present.

    Louis XV is reported to have said, " Après moi le déluge!" which roughly translates to after me, the downfall. It appears that CEOs have the same attitude.

    2. Regarding jobs. As a COO I would hold off hiring new people as long as possible, as I am rewarded on profitability, not social responsibility. Change the reward system and we might have more jobs.

    The real issue is that we are moving toward a bi-model society, with low paying service jobs at one end and highly skilled jobs at the other, with nothing in the middle.

    It is probably time to rethink the concept of work and education which has grown out of our agrarian background and morphed through the industrial revolution. Does it fit a computer/robotic society?



    Bob

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