In 2008 America entered an economic recession, with some referring to it as the worse since the great depression and 1.9 million American's lost their jobs. However, this did not stop CEO's from lining their pockets. In 2008 only 20 percent of all the corporations who terminated employees were led by a CEO who took a reduction in compensation and a whopping 80 percent either received a raise or their pay stayed the same. How did they do it? or How did they get away with it?
How They Did It? Get me a Consultant who can Guarantee "Mine is be Bigger than Yours"
Let's begin with a basic assumption that in a corporation no one is worth 400 or 500 times another person and when a CEO makes 400 times their lowest paid employee it lowers morale, creates cynicism, increases theft and sabotage, and lowers productivity. So why do they do it? Transparency allows CEOs to know what other CEO's get and it creates what I call "compensation envy."
Consider this question: Why do companies try to keep knowledge of employee compensation secret? Every HR manager knows why. To avoid envy, conflicts, and demands for more. This has been practiced for years and HR and payroll departments typically have policies and rules to maintain confidentiality and in some corporations discussion of compensation can be grounds for immediate dismissal. Most companies require that their employees keep their compensation secret and they are typically told they are not allowed to discuss their salary with anyone else in the company. On the other hand managers and supervisors know what all of their people make and they have a distinct advantage when review time and annual salary discussions occur. How can an employee negotiate compensation when he/she has no comparison, that is, they do not know anyone's compensation? Management wants it this way. In many companies employees spend time guessing what others make. They look at how employees and colleagues dress, where they live, the quality of their car and general lifestyle and departments are rife with rumors that can create debilitating envy and hate.
But this is not the case for the corporation's officers, they not only have comparisons, they have consultants who provide them with ample industry data on executive compensation. It turns out that compensation transparency is a toxin for those who want to reign in pay. Like celebrities contemporary CEO's now have agents, called compensation consultants. In the celebrity world of show biz, professional sports and publishing, agents love to announce a big payday for their clients. It keeps moving the bar upwards and their 10 percent cut grows bigger. I have not heard of a compensation consultant getting 10 percent of a CEO's package but the day will come. Already compensation consultants identify their client base on their web pages and they want a reputation of negotiating big contracts for their clients.
CEOs have been accused as a group of having their compensation systems rigged by these highly paid consultants who do things like structure guarantees that their clients will obtain a handsome bonus no matter what the company does. In addition they putting in place bonus systems that only rewards short term goals and cost cutting.
The work of compensation consultants is to report to the CEO and the Corporate Compensation Committee comparative salaries. Several studies suggest that corporate size is the most significant variable in determining CEO compensation accounting for as much as 40 percent of the variance. Consultants assess every imaginable perk from tax advisers to club dues to home security systems. The question arises: What is the function of this research? From a psychodynamic perspective it serves to give the CEO a degree of security in the world of CEOs that they are not weak, or any less than other CEO's and if they become compensation leaders in their industry then they can feel all powerful. This need for more pertains to the CEOs entire compensation package, not only salary and stocks but an array of perks. Many claim this type of thinking leads to runaway compensation. For example when the compensation consultant reports that some CEO "leapfrogged" other CEO's this shakes the system and now other envious CEO's will want to jump up the compensation scale to either catch up or move ahead. This promotes compensation escalation. It is in their best interests for these consultants to promote envy, jealousy and competition. CEOs have their compensation ranked in business magazines newspaper they can see where they stand. To be ranked low is considered a sign of disrespect and failure and weakness and when this occurs they spend inordinate amounts of time trying to catch up and move up in the compensation rankings. CEO compensation is also an issue among executives within the same corporation. Executives want their boss to be a "top banana." If their CEO's pay is in the top five categories then the VPs expect to be in the VP top five. These executives may work in corporations that forbid disclosing or discussing compensation but not in the executive suite, considerable time is devoted to compensation issues and careful assessment of the compensation updates in their professional skill areas given to them by consultants.
In a way this explains what is decried as greed, but there are other factors that fit into the compensation equation for these CEO's.
Becoming a Multimillionaire Executive
Here is a simple question: Can an executive who becomes a multimillionaire still manage? Or, how does excessive concern with compensation impact the executive constellation and their capacity to manage? Most executives not only push for compensation packages and think they are fair and justifiable but they also want packages that will set them and their family for life. However, I found that when they achieve their goal and have the big pay day their world changes. Here I see the reason for an inverse relationship between excessive CEO compensation and poor long term corporate profitability. There are many jokes and even TV commercials deploring how difficult it is for a stockholder to get in contact with their millionaire stockbroker, and there is an element of truth to this. When these executives become multimillionaires they are now preoccupied with their own wealth management and they pay less attention to the ship they are captaining. There are some research studies that look at factors that contribute to declining company stock and they all have one thing in common, a CEO who is distracted. Decline in corporate profitability is associated with CEO's: who are building a new home, going through a divorce, dealing with physical and mental illness, and of course obtaining great wealth. These studies suggest that when the CEO is preoccupied and cannot devote the necessary time and energy to managing the company, the company suffers. I found that not enough time is given to careful decision making and if we couple paucity of time with grandiosity then quick thoughtless decisions have the potential to bring ruin. I find evidence of this with two retail giants Home Depot and Circuit City.
Bob Nardelli entered Home Depot as CEO in December 2000 and was paid around $28 million and soon began to build a mansion in Atlanta. At the same time he decided to institute cost-cutting measures. He cut fulltime jobs, capped wages, and recruited former military officers to run the stores. Staff morale and customer service began to collapse under his new regime. The number of part-time employees skyrocketed from 26 percent to as high as 50 percent in 2002. In addition, he replaced many experienced store associates who made high hourly wages, with inexperienced part timers (Alic, 2007). His overpaid executive constellation, using data from Six Sigma discovered that there were many senior and experienced store associates making upwards to $28 per hour. A cost analysis pointed to the cost of these salaries and the savings the company could obtain if the high priced sales associates were replaced by $10 per hour part-timers. Home Depot veterans were horrified of the consequences of the plan; understanding the brain drain, the impact of the loss of experienced sales people, and how their absence would negatively impact customer service. But they remained quiet and only shared their thoughts with trusted colleagues. Some did suggest doing a pilot study. However, this type of thinking was rejected. In the face of overwhelming evidence, Nardelli came to believe that profitability and share holder value would increase if they fired the high priced full time hourly associates in their stores. He made his decisions and in the first two months there was elation as the bottom line improved and profits rose. Then disaster struck and customer service rapidly dropped and the stocks began to slide. In 2005 Home Depot slipped to last place among major U.S. retailers in the University of Michigan's annual American Consumer Satisfaction Index. It is doubtful the company will ever return to its former days of quality customer service.
In 2003, Philip Schoonover the CEO of Circuit City did something similar. The second largest electronics store in the America switched employees from commission- based pay to hourly pay and then he fired 3,400 of its highest-paid hourly and most experienced sales employees and hired inexperienced replacements willing to work for less. Like Home Depot, quality customer service turned from good to bad overnight. In November, 2008, Circuit City announced that it was closing 155 stores and terminating 7,300 employees, and amid financial troubles declared bankruptcy. Schoonover, who resigned in September, 2008, was paid $8.52 million in fiscal 2006 and his severance package is estimated at $1.8 million. In January 2009, Circuit City announced it was closing all of its stores and going out of business. Schoonover's executives asked the bankruptcy judge for permission to pay up to $4.65 million to "incentivize" them to stay and help shut down the company (Iosco, 2009).
The foolishness of these decisions made by newly minted multimillionaire executives brings three interpretations to the fore: (1) This first interpretation falls into the category of "Wild Analysis" and it goes something like this: Just as one can be unconsciously motivated and capable of ruining their health, marriage, career, etc. one is just as capable of destroying a corporation. (2) Sudden wealth can bring forth a heightened sense of assuredness, feelings of omnipotence, and perhaps self righteousness. Couple this with (3) a new preoccupation in the executive's life, i.e. wealth, and entry into new social circles brings forth a new set of issues and problems that makes the day to day management of the corporation difficult. The newly minted millionaire CEO is preoccupied and removed from the people he/she works with on a daily basis. Given these changes one could understand how these foolish decisions can occur.
This may explain why many CEO's increase their compensation as they terminate their employees. For most people terminating employees will fill them with angst and to obtain a reward would be unthinkable. Not these people, they are too emotionally disconnected.
Why do CEO's receive handsome increases in compensation no matter what they do? There are several explanations. First is a psychodynamic assessment, it is concerned with the wish to maintain the illusion of success. Second is associated with the short stay at top. The third is associated with living in the CEO's world.
The Illusion of Success, Entitlement and Vitality
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