Saturday, November 12, 2011

What are the consequences of extreme executive income?

Despite a few hiccups in our economy, the diversion of money to executive compensation continues, particularly to the shareholder employees [1] of large publicly traded corporations. The US is in the lead, but other countries are following a similar trend.

I've seen much discussion of the trend, but not so much about the effects on corporations - regardless of social justice or market operation [2].

I don't think we know what it means, but I can make some informed guesses.

First, we can dispense with the myth that employees don't know what CEOs are paid. I suspect even people working with their arms and backs know their CEO's compensation. Certainly middle-management and knowledge workers know.

So how does that affect employees? And, perhaps more interestingly, how does it affect executives?

Employees, in most corporations today, see limited raises, underfunded projects, difficult work conditions and employment uncertainty. They do the arithmetic; half the CEO's compensation would fund all the projects they know of. This has obvious and direct effects on morale.

No, they don't imagine they'll sit in the CEO seat one day, or even another C-seat. Employees aren't that dumb.

How does this affect executives?

Well, it's a rare human who doesn't think they deserve their salary. If you pay a CEO 50 million dollars, they assume they deserve 50 million dollars. They can do arithmetic too. This must mean they are 250 times smarter, faster, wiser, stronger, and better than their superstar worker bees. They have gifts far beyond the ken of mortal men.

They make decisions accordingly.

It also moves the executive class into a different sort of reality. They still age and die, but most of the time that is forgotten. They are free of the other concerns of mortal life. They don't fly coach. They don't deal with time tracking and travel expenses. They don't have to manage their Flex accounts. Their lives are relatively complexity free.

Executive hyper-compensation may explain a lot of the poor decisions and poor returns of the modern publicly traded company. Not so much from the diversion of revenue, but from its impacts on employees and, most of all, because of its effect on executives.


[1] The CEO, CFO, etc of a publicly traded company are, in theory, employees of shareholders.
[2] I think this is a market failure. I've known several CEO class executives. They are not necessarily imaginative, insightful or academically intelligent, but they are always good at operating in the corporate setting, they always work very long hours, and they always sacrifice a great deal. Whether that helps the corporation or not is debatable; their selection pressures are complex. Even so, it would be reasonable to compensate a CEO of this sort at 1-2 million dollars (total) a year. We are far beyond that level of compensation at large PTCs.

There is a contrary argument of course. At a certain level of power and wealthy, individuals gain direct access to the global wealth stream. There are many ways to divert tens of millions of dollars from that stream that don't involve working for a PTC. Perhaps that's what boards are bidding against.

No comments: