12 June 2009
12 June 2009,
 4

Now we have a “Compensation Czar.”

Yesterday President Obama named Washington attorney Kenneth Feinberg “special master for compensation.” How did we get to a point where the federal czar pool included somebody who has to watch Corporate America’s cookie jar?

Amid the chatter about poorly rated subprime mortgage bonds, financial weapons of mass destruction and loony corporate and consumer leverage, CEO and senior management pay hasn’t come in for an appropriate amount of blame for our Great Recession.

It’s sad that it has come to this. But maybe it’s the lesser of two evils. I’m hardly playing fast and loose with the word crazy to characterize the recent history of CEO pay. The ratio of CEO pay (salary, bonus, stock grants) to average worker pay was 24-to-1 in 1965, according to a 2005 Wall Street Journal report. In 2005, it had reached 262-to-1. (My pay was 8-to-1 when I was CEO of a $200 million per year retailer.)

You may ask, So what if these ratios are stratospheric? (You may also ask why I didn’t pay myself more, a subject for a later post.) Companies have various stakeholders: CEO and senior management, line employees, customers, shareholders, the community in which they operate. If the CEO and senior management take a large stake, it has to shrink the stakes of the other stakeholders.

It’s hard to take the stakes away from the customer since management competes every day with its rivals on price and quality. That leaves employees, shareholders and the community getting shafted. Employees, especially the lowest paid, are the most vulnerable. Before the crash, CEO’s engineered huge pay increases as they vigorously fought increases in the minimum-wage that hadn’t budged for a decade (see Barbara Ehrenreich’s “Nickel and Dimed”). The irony that must be lost on CEO’s and boards is that the declining real wages eviscerate their customer base.

Golden Goose, meet Death.

Meantime, the official memo from the corner office says that capitalism is so darn fair. Indeed, capitalism is fair … unless the egos and greed of CEO’s and senior management go unchecked. Then we have feudalism masked as capitalism; serfs working for overlords.

Shareholders feel the sting as well. For those who have made enough lately to pay expenses and taxes AND make investments, crazy executive pay has hurt their 401(k)’s and mutual funds. Anyone who invested in an index fund tied to, say, the S&P 500, has lost 27 percent over the last ten years.

Massive bonuses and stock grants without claw-backs encouraged reckless investing that led to 2008’s crash.

Finally, communities lose when executive pay eats into the share of profits that they often earn from their “pillars of the community.”

The good news? Thanks in part to Warren Buffet’s crusade more and more boards feel shareholder and community pressure to make sure that CEO’s and senior management don’t win at the expense of everyone else. One day, maybe CEO’s will learn that, as my dad always used to say, pigs get fat and hogs get slaughtered.

[NEXT BLOG: How to terminate in an age of downsizing.]

4 responses on “Crazy CEO Pay Kills the Goose that Lays the Golden Egg

  1. Allen says:

    I appreciate the labor you have put in developing this blog. Nice and informative.

  2. Anonymous says:

    Tom seems to have an uncanny ability for spotting and tapping into the truly important stuff to make businesses successful. I’m recently unemployed from a multi-billion dollar corporation that could have benefitted significantly from his input.

  3. Thanks. Glad you find it useful.

  4. So sorry you lost your position. Good luck on your journey to source a company who does believe in compensation fairness throughout the company.