"An era can be said to end when its basic illusions are exhausted." - Arthur Miller

Monday, April 09, 2007

CEO Pay Reaches Ridiculous Proportions

Want to know why the strength of American business is falling, why Detroit auto makers fail to make solid decisions, why the Enron's occur, all you have to do is look at executive pay and bonus' system that is prevalent across the American business model.

As a recent report shows, from 1995-2005, CEO pay has gone up 298% compaired to the average worker's going up only 4.3%. That is a tremendous amount of difference. Sure the CEO is technically important to a company but as the recent history has shown, they sure do seem to get replaced as easily as any line worker which makes you wonder just how important they really are. What the graph doesn't show is the impact of bonuses have on pay. Often times the bonuses an exec gets if as high if not higher then their yearly salary.

On top of that, it seems few companies tie performance into pay or bonuses like they do for the line workers. As the Detroit automakers such as Ford have shown, where they set aside around $60 million of capital for exec bonuses while laying off half their workforce, that what they get in pay and bonuses have little to do with actual performance. Fail to do your job, get a bonus. Do you job, get a bonus. Giving those choices, it seems many have chosen just not to their job, why bother since they will get paid either way. The standard seems to be that there is no standard.

On top of that, if a company does decide an exec can't do their job, they pay them millions and millions of dollars to go away. A Home Depot exec was payed $59 million in severance package for 4 months of work. How many salaried employees would that have paid for?

Then their is those companies that do tie bonuses into performance. If the exec wants his muli-million dollar reward, he is going to make choices that make the short term of the company look good at the sacrifice of the long term. An excellent example is Detroit once again. Ford (i think) was ready to enter the Hybrid market about the same time as Toyota. But they decided that profits now with SUVs where more important then profits later. The result is they abandoned an entire car market segment, conceded it to the competition by the simple act of looking at short term goals instead of long term goals. I am betting that when the exec's made that decision, it was over concern that bonus numbers would be met, not what was best for the long term future of the company.

The short of it is, CEO's should be held to the exact same standards that the average employee's are held to with the same rewards for success and the same punishments. A line worker does their job, they get a small bonus that usually represents a small % of the workers overall pay, that should be the same for CEOs. If bonuses are not allowed for workers, then no bonuses for CEOs. If no raises do to economic hardship for a company, no raises for the CEO. Line worker fails to do their job, they get fired without a net and no mulit-million dollar severance package, neither should the CEO, they should get kicked to the curb like anyone else. Its a simple reverse, "I do to myself what I am willing to do unto you" philosophy.

Here is an example of outrageous pay. Staples CEO gets $10 million bonus on top of his $1,070,192 salary. For simple act of doing his job, he got nearly 10 times his salary. Wouldn't we all like a bonus like that? Wouldn't we all make a lot of difference decisions with that kind of money on the table? If in charge and had to make a choice between a long term benefit to a company but sacrifice such a bonus, or make a short term decision that gives you such a bonus, wouldn't you make the short term decision? CEOs talk in terms of "the shareholders!!" but really its "the bonus!!"

No comments:

Post a Comment