Natalie Mizik and Robert Jacobson wrote an article entitled, The cost of myopic management for the July/August edition of the Harvard Business Review in which they explored the costs paid by the organization (and ultimately investors) when they become too focused on short-term revenue targets and begin inflating their earning by cutting expenditures. During their study executives would cut discretionary spending, which often included R&D, in favor of more impressive looking earnings. Mizik & Jacobson tracked over 400 companies and found that those firms that practiced “myopic management” would often have very impressive returns in the short-term, but long-term performed miserably. In order to begin to correct this behavior, firms need to begin to penalize executives for losses, not just reward them for gains. In addition, a portion of their compensation package should be tied to tenure, long-term growth and brand strength. Once an executive’s compensation is tied to long-term goals and objectives the myopic behavior will change as well.
I read an article on PC World about the rumored layoffs by IBM – the rumors are reportedly bogus – and I began to reflect on the Douglas Mattern article entitled, CEO Pay is Outrageous and It’s Undemocratic. In particular, the following quote really stuck with me.
Business Week reports that the disparity between the ‘shop floor and the executive suite’ is at an all-time high. In 1980, CEOs made 42 times the average blue-collar worker. By 1990, this disparity rose to 85 times, and by the year 2000 the disparity between worker and CEO climbed to 531 times as much.
This trend is particularly bothersome because while it may motivate those employees who are striving to become CEOs, it mostly de-motivates blue collar and other lower paid employees – those that are most susceptible to layoffs. While the CEOs role is critical and is a very stressful position, in general they are being disproportionately compensated – often with little or no direct ties to the performance of the company. For example, Bob Nardelli when he accepted the position at Home Depot refused to have his compensation tied to the stock price of the organization. Over his six year tenure, he made many moves to make the organization “lean and mean” which both drained morale at this once proud organization and had negative impacts on customer service.
While some organizations are cracking down on CEO pay packages, most still provide lucrative “golden parachutes” to CEOs. The CEO severance package, which are often for multiple millions of dollars, include additional benefits on top of the enormous compensation packages that they received during their tenure with the company. What’s maddening is that these packages are paid out after the organization decides that, based on a lack of performance; they need to replace the CEO. Employees will see the total pay packages of the CEO and also witness hundreds, if not thousands, of their fellow employees get laid off due to budget cuts and restructuring and it is not hard to understand why they would lack motivation.
So while the IBM story may not be accurate, it is nevertheless tough to watch as employees get laid off due to ineffective, grossly overpaid executives.
Filed under Bob Nardelli, CEO, CEO Pay, CEO Salary, Douglas mattern, Executive Excess, Executive Pay, Golden parachute, Home Depot, IBM, PC World