by Jack Lee
Tina and I have been having a little sideline debate (in comments) over what I termed as excessive CEO salaries, a hot topic these days. Don’t get me wrong, we’re both free traders and I sure don’t want government to control salaries, but I think the climb in huge compensations for the bosses of this country has gone way too far. When that happens there’s a number of reasons why you should be concerned.
I’ll try to condense down my major points and you decide if I am right or wrong :
Capitalism is based on competition and that means doing it better than the next guy. That’s fair, but when the stakes get high, so does the temptation to cheat or bend rules. As a nation we’ve been a little lax in enforcing that area of behavior and it’s hurting us financially.
Example time: Lets say you’re the CEO of a big company, knocking down a salary of $100 million a year. Where would you draw the line on what you would do to earn a $100 million? Many of us would respond with, “Who do you want me to kill?” At the very least it would cause us a lot of temptation leading to bending or breaking some rules. There’s too much at stake not too!
Here’s our first conundrum: This is the extraordinary temptation/pressure placed upon 99.9% of our top executives all over America. They are inclined by any number of motivators to do whatever it takes to stay ahead of the game. But, do 99.9% have the strength of character to do the right thing? I think the answer to that is already in and it doesn’t look too good for character.
We should have checks and balances (call it moderation if you will) in everything we do, from our personal lives to business (and especially in politics). The more power and money that is acquired – the more moral behavior it takes to manage it. However, somewhere on the way to being the worlds greatest superpower we’ve overlooked the teaching of ethics and it’s showing up in scandals from Wall Street to Washington. Leave it to a deep recession to make this one abundantly clear!
Consider the example of how a whole group of highly educated, intelligent and
otherwise decent people working at ENRON went into the tank for that huge payoff of doing whatever it takes to win. When they were caught the results were devastating for us. This scandal rocked the energy sector and exposed even more fraud, whole sector seemed dirty. Yet the people responsible for the cheating got off pretty light and some escaped with no penalty at all.
No amount of leadership prowess can ever compensate for a lack of moral character:
Something happened a little over 30 years ago in this country that triggered a trend wealth consolidation that continues to this day. I believe it was companies competing for the best and brightest…they began offering higher and higher executive salaries as one the primary ways to grow their businesses. It was a reasonable thing to do and there was an immediate and positive return for this [investment]. So it was that concept took root, but like all good ideas, there comes a point of diminishing return.
Along the way to mega-riches many things changed and not for the better. Some of the wealthy felt omnipotent enough to try to undermined the basic principles of free trade. To see what they did you need only look at the scandal sheet, and read how many companies have been damaged and stockholders fleeced.
There were many creative and innovative ways these white collar criminals used, but then what can you expect, they are the best and brightest! They just don’t always have that moral compass to keep things fair and honest. In the 80’s on until today there are countless examples of corporate bosses engaging in price fixing, violating anti-trust laws and worse. Some cooked the books, some bought off independent accounting firms so they could cook the books or at least overlooked accounting [infractions], and some looted pension funds. There were many, unsettling ways that our business titans devised to beat the system and keep their personal cash flowing.
Looking back over this brief, but dark history, one of the simplest, and unfortunately legal, ways to obtain great wealth was to hand pick the board of directors, then set your own salary! With a multibillion dollar company, it’s not hard siphon off $10-15 million in excessive salary. It’s drop in the bucket compared to the gross, few ever noticed or cared, as long as the company was performing well. When this starts enough is never enough. Year after year we’ve seen this salary setting scenario repeated by too many hand picked BoD. I’ve never known stockholders to be able to stop it either.
Digressing a bit, companies that started this salary competition started something they couldn’t imagine, because in time it became a virtual explosion of wages that went from 18-25 times average worker pay to 100X, 200X, 300X, and for some it kept right on going, the gold rush was on! Unfortunately, this rising tide did not raise all boats. The money only created a larger gap between the ultra rich and everyone. Not unpredictably, the scandals increased and so did corporate failures.
Amid this semi-legal and outright illegal plundering in the private sector, our government exacerbated the phenomena with their own plundering, incompetence and attention diverting scandals.
Some of the more draconian gov. restrictions on corporations encouraged the leaders to bend the rules. Once that began it was easier to bend other rules.
There is many things that can push a CEO into an area that gets dangerous for us and its why we’re in the mess we’re in.
CEO’s don’t just go from their Ivy League College to being corporate pirates overnight, it takes indoctrination and corrupting events to get to the level of a Jeff Skilling or a Bernie Madoff. Government incompetence was made to order for those financial wheeler-dealers willing to do whatever it takes to win.
Remember, Worldcom, Enron, Health South, Tyco International, Stanford Financial Trust, KPMG Accounting, Adelphia, Arthur Anderson and Associates, CMS Energy, Dynegy, El Paso Gas, Enron, Global Crossing, Homestore.com, Mirant, Nicor, etc.? All of these companies were victims of weak ethics. People at the top, people of great wealth who felt above the law, who succumbed to the pressure either to perform or to obtain more wealth and power. The actual list of these mega failures would probably fill pages, but you get the picture. Sadly, this chicanery has had a landmark impact on our collective trust and the economy.
So much for the theory that high compensation makes for better management!
When the Great Recession hit, the tide went out and exposed many things. A lot of awakening happened too and we were stunned (and insulted) to find how far the looting by CEO’s had gone! It makes the average person more than a little ticked off to see that Stephen J. Hemsley, CEO of United Health Groups is making $101,965,00 a year while we’re forced to cut back on milk and hamburger. Is anyone really worth a $100M a year?
Imagine the process we’ve gone though to somehow justify that a guy like Hemsley is really worth 1670 X more than his employee’s average salary. And he’s but one of many hundreds that have gone way too far. Such revelations in a prolonged recession are hard to handle. Like it or not, this explains some of the motivation behind OWS.
Does a CEO that never even made his company a profit deserve a multimillion dollar golden parachute as the company goes under? It’s happened many times…bankrupt Fannie Mae, Freddie Mac bonuses come to mind now.
It’s beyond frustrating when you see the big picture and much needs change. Don’t worry, much will change now because the global dynamics have changed. The old rules have changed and a new awareness spreads across America. The gluttony and corruption that has plagued big businesses is coming to light and in so doing it will be forced to stop. It was inevitable this should happen, because once the people understand what’s been going on they will mandate a change. Those scandalous CEO salaries, which have also affected the public sector salaries, are going to be totally re-examined under new conditions of austerity. Those fat salaries were no more sustainable than an unlimited government credit card. Now here’s the good news: This is how the free market works. These are the free market forces that will now do what desperate shareholders and those inept board of directors have to date been unable or unwilling to do. The day of reckoning is approaching.
(Okay…let the debate begin! I’m ready.)