Is executive pay out of control? In the 1980s, the average CEO made 40 times a company's average worker salary. Today that ratio is 400 to 1. How does the average knowledge worker feel about that?
"Forget overpaid CEOs," says Vince Beiser. "Now second- and third-tier execs in American companies are getting enormous salaries--as wages and benefits for many workers stagnate or fall."
At the same time these same executives are worrying about how to secure the commitment of front-line knowledge workers, is a "let them eat cake" attitude the single biggest barrier to employee engagement? Beiser talks about VPs and GMs cruising on corporate jets and checking into sumptuous hotel suites. He notes that BusinessWeek recently found 10 sub-CEO executives making more than $29 per year. He quotes James K. Galbraith explaining that worker/executive pay ratios haven’t been this bad since the Depression.
We're not talking about corporate criminals of the Enron or WorldCom type—corrupt executives who pocket outrageous sums by scamming the system or ripping off investors. Nor are these the entrepreneurs whose inspirations and nerve started the company, or the investors who risked their capital to fund it. These people aren't even the top boss, who is under the most pressure, the one with whom the buck stops. They're hired hands—company employees just like the people they oversee. Their salaries are set by legal and transparent means in accordance with prevailing industry standards. It's just that those standards have gone completely off the rails. Never mind the imperial CEO; we have entered the era of the executive plutocracy.
Beiser understands the “economic and cultural shifts” behind executive inflation.
The prototype executive of the 1950s and 1960s was the gray-suited Organization Man. But in the early 1980s, with Wall Street on the rise, big-time businessmen began to assume the cachet of movie stars and sports heroes. Suddenly, guys such as Lee Iacocca and Jack Welch were writing bestsellers, grinning from the covers of major magazines and yukking it up with Leno and Letterman.
Institutional investors measuring performance in stock price, not long-term value force desperate boards to bring in outside talent at prices intended to prove their superiority. Salaries spiral upward as pay grades become a shorthand for perceived personal value. But the costs to organizations and to society go beyond the deductible perks
While life has grown ever lusher at the top end of the corporate food chain, it's increasingly precarious for those farther down. As income for top executives shot up, average American workers' salaries have barely kept pace with inflation—and many are finding their jobs, health coverage and retirement prospects in jeopardy.
Typically it’s workers who pay the price first. Low unemployment figures are misleading. Though the percentage of Americans out of work is still relatively low, the churn of layoffs and rehirings often results in underemployment--a decline in salaries, benefits and job security that is a far cry from the steady upward mobility we were raised to expect.
If ordinary workers' annual pay had risen at the same rate as CEO pay since 1990, a report by the Institute for Policy Studies points out, they would be making $75,338 today—instead of the $26,899 they are taking home. Adjusted for inflation, that's only marginally more than what they made in 1980.
A few years ago in destinationKM, I riffed on a Malcolm Gladwell article, "The Talent Myth: Are smart people overrated?" (The New Yorker, July 22, 2002). Her blamed McKinsey consultants for fanning the flames of the War for Talent the way yellow journalists fanned the flames of the Spanish-American War.
The broader failing of McKinsey and its acolytes at Enron is their assumption that an organization's intelligence is simply a function of the intelligence of its employees. They believe in stars, because they don't believe in systems. In a way, that's understandable, because our lives are so obviously enriched by individual brilliance. Groups don't write great novels, and a committee didn't come up with the theory of relativity. But companies work by different rules. They don't just create; they execute and compete and coordinate the efforts of many different people, and the organizations that are most successful at that task are the ones where the system is the star.
I was wondering about "Collateral Damage in the War for Talent." It seemed to me that the quest for talent might be to blame for the confusion about values and valuations, accounting and accountability.
There are many ways in which the social, political and economic forces at work in the marketplace can so skew our perspectives that we confuse values with valuation and accounting for accountability.
Malcolm Gladwell, a staff writer for The New Yorker and author of The Tipping Point, suggests that simple greed may not be the only cause of the current epidemic of corporate misbehavior. In fact, he places the blame much closer to an issue that lies at the heart of the knowledge management and intellectual capital movements: what McKinsey & Co. consultants call "The War for Talent."
Theoretically, in the knowledge age the key to competitiveness is an organization full of smart individuals who know more, learn faster and work together better than the next company.
In practice, talented executives hire talented employees who may be brilliant but are often too self-absorbed to work with others and too driven to even consider if their ideas are actually going to work. But by then it's too late because their high salaries, hyped reputations and the embarrassment their failures might cause the ones that hired them combine to create an assumption that the rest of us are just too blind to see their genius. Blame the system, but we are the system.
In the July 22nd issue of The New Yorker magazine, Gladwell makes his case with McKinsey's star client, Enron, which raised the cult of talent to new heights. Less than a year after the energy company's collapse, have we already forgotten how much it was celebrated?
"The management of Enron, in other words, did exactly what the consultants at McKinsey said that companies ought to do in order to succeed in the modern economy. It hired and rewarded the very best and the very brightest--and it is now in bankruptcy," he writes. "What if Enron failed not in spite of its talent mind-set but because of it?"
Gladwell wonders if smart people are overrated. Emotional intelligence experts would underscore his question. There is almost no correlation between intelligence and actual job performance, especially when it comes to common-sense job functions such as self-discipline and working with others.
"The talent myth assumes that people make organizations smart. More often than not, it's the other way around," he says.
Enron aggressively rewarded its best and brightest, and in turn was rewarded by the markets and business press alike. But talent was about potential as well as performance and stars were often promoted so fast that their real performance was never really evaluated.
One manager lost tens of millions of dollars running one business unit, millions more after being promoted to another, and ultimately cashed out with $270 million to show for it. Management--and management gurus--pointed to this as an example of how companies must tolerate risks and forgive mistakes in order to remove the barriers from learning and innovation.
"Presumably, companies that want to encourage risk-taking must be willing to tolerate mistakes," Gladwell wonders. "Yet if talent is defined as something separate from an employee's actual performance, what use is it, exactly?"
What Gladwell implies--but doesn't speculate on--is the importance of another kind of intelligence. Not emotional but ethical. There is nothing in either cognitive or emotional intelligence that guarantees judgment of right and wrong. And yet this is at the heart of what makes teams and businesses succeed.
Values can certainly go astray in an a community, but they go astray faster when individuals are not only left to their own devices, but encourage to assume that all rules don't apply to them.