I was reading the Beck and Fordahl article, “CEO pay climbs despite companies struggles” when three sentences leapt off the page at me.
Rick Wagoner, CEO of General Motors, (GM) announced this month the company had to close four plants that make trucks and SUVs because of lagging demand as fuel prices soar. That followed the posting of a $39 billion loss in 2007, a year when its stock price fell about 19%. And Wagoner? His pay rose 64%, to $15.7 million.
Did I read that correctly? GM posted a $39 billion loss in 2007 – well actually $38.732 billion but who is counting – and that is after posting a $1.978 billion loss in 2006 and $10.567 billion loss in 2005. The company is also closing four plants, which is expected to affect approximately 2,500 employees – while some may be able to transfer into positions vacated by approximately 19,000 employees who are expected to accept early retirement and buyout offers. And while GM and its employees struggle through a very tough time, Rick Wagoner’s pay rose 64% – a truly amazing figure, particularly in light of the current state of the company.
And while, Wagoner announced that the plant closings, transition to smaller and electric cars and other cost-saving measures will save the company close to $15 billion a year, those savings are not expected to be realized until 2010. While those changes may have a dramatic impact on the business, the company’s recent performance does not warrant an increase in pay for Wagoner – surely not a 64% increase.
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
Recently I read an article written by Nathan Bennett and Stephen Miles which was published in the May 2006 issue of Harvard Business Review entitled, “Second in Command” which discusses the relationship between CEOs and COOs. The authors point out that no two COOs have the same job description – not even two that have been employed by the same organization. This, they argue, is a result of the fact that position is determined largely by the needs (and strengths and weaknesses) of the CEO. They quote statistics that show the gradual decline in the number of COOs who are currently employed. More interestingly they point out that 17% of COOs, who are promoted to CEO, elect not to hire a replacement COO. I am surprised by this statistic, because I would imagine that a former COO would understand the benefit that a COO brings to an organization.
Many would agree that, among many other things, the CEO needs to be focused on the long-term direction and strategy of the organization. The COO should be focused on the day-to-day operations of the business and implementing the CEOs vision. A mistake that some organizations make is by having a CEO who is too tactically focused. If we view those companies over a 5, 10 or 15 year period, I am willing to bet that those organizations – with tactically focused CEOs (and no COO) – will be much less successful than those with a CEO and COO.
Companies do need a second in command. The CEO can not effectively be both strategically and tactically focused. They need a trusted employee to focus their attention on the daily operations of the business and on executing on the CEOs strategy.