Comment: The Gekko Doctrine-Fair Pay in an Age of Greed
Click for Comment Archive at bottom of page
May 10,2004-In the 1980's, the Gordon Gekko character played by Michael Douglas in the movie Wall Street became an icon of the decade because of his mantra on greed. (The point is, ladies and gentleman, is that greed -- for lack of a better word -- is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind. And greed -- you mark my words -- will not only save Teldar Paper, but that other malfunctioning corporation called the USA- Click for the full speech to Teldar Paper Stockholders). The Gekko Doctrine is as strong today and those of us who have teenage children who wonder if they have any other values beyond money should possibly look in the mirror! The question of what is fair pay for a job is not an easy one. The camel seldom sees his own hump and it is striking that strikes by low paid public service workers in for example the UK, are often portrayed in their media as an illustration of greed, by people who are much better past masters at feathering their own nest.
The issue of high executive pay was raised last week on RTE Radio One's Morning Ireland programme when Sean Fitzpatrick, Chief Executive of Anglo Irish Bank-Europe's most successful bank of the past decade-was asked how could he justify earnings of €2.3 million, ten times the level of the Taoiseach's (Irish Prime Minister)? Mr. Fitzpatrick referred to the earnings of footballers to justify his earnings. Given his own relatively unique record of achievement, that comparison may be apt but the problem is that it is too easy in the business world to make comparisons with top footballers and artists who have unique skills. Just look at the blurring of the distinction between hired hands and entrepreneurs. The high paid entrepreneur is one of a small number of the many who either succeed on a limited scale or fail in developing their own businesses. The distinction with the hired hand is important because an individual who works through the ranks in an established company is not comparable in terms of the pressures and risks taken by the typical entrepreneur.
The classic case of the hired hand who ends up with a spectacular bonanza is Richard Grasso who was ousted in September 2003, as Chairman of the New York Stock Exchange (NYSE), following revelations that he had accrued $139.5 million in deferred salary and retirement benefits. The compensation committee members who had nodded through the extravagantly generous package, were wealthy representatives of New York's biggest investment banks. They were in effect determining the pay of their not-for-profit regulator. Not only has Grasso already received the payout, the exchange has made a provision to pay him $36 million more in case he succeeds in a claim for further compensation. New York's activist Attorney General Eliot Spitzer is expected to initiate a lawsuit at the end of the month to seek a return of the bulk of the booty. Spitzer is expected to argue that board members violated their duty of trust to protect the exchange's interest. He may also argue that the pay amounted to the distribution of NYSE's not-for-profit surplus to an executive. Grasso is expected to claim that he was responsible for the huge growth in the exchange's income during a surging boom and for its swift recovery following the 9/11 terrorist attack. The truth of course is that Grasso was primarily a cheerleader during the boom. As to 9/11, what debt is owed to New York's firefighters if this man gets away with a delusion or smokescreen that he has superman powers?
Irish high earners have generally operated at senior levels during a period of prosperity. Few have been tested sailing against the winds of recession. The multiple that a CEO should be paid including the allocation of free shares compared with the bulk of a company's staff, is an interesting question. According to Kevin J. Murphy, E. Morgan Stanley Chair in Business Administration, Marshall School of Business, University of Southern California: 'Since 1970, cash compensation for CEOs has gone from 25 times the pay of the average worker to about 90 times the pay of the average worker. Total compensation, including stock options measured at grant value, went from just over 25 times average worker pay in 1970 to a peak of almost 600 times average worker pay in 2000, and has now dropped down to about 360 times average worker pay.' In Ireland, average annual industrial earnings for male employees is €32,200. According to a Sunday Independent survey average Irish CEO pay was €814,000 in 2003 representing an annual increase of 8.5 per cent. In addition, many CEO's would have significant wealth from shares allocated in their companies.
The problem with executive pay levels is that competition is not generally the exclusive issue. It is often argued that senior executives compete in an international market but the reality is that this market is a very small one. According to Professor Murphy, in a paper he co-authored, it was found that: '62 of the top 800 CEOs in the United States are foreign born, and 30 are originally European. But the number of European executives who were born in the United States is essentially zero. Of course, what we’ve seen with CEO pay is not unique. We’ve seen it in athletics big time: foreign-born athletes routinely end up in the United States.'
In the UK, Nick Isles of the Work Foundation debunks a number of conventional wisdoms in his publication Life at the Top: The Labour Market for FTSE-250 Chief Executives. Isles writes: 'As Frank and Cook asked in their 1995 book The Winner-take-all Society, what happens at the top of certain labour markets when so many want to do so few jobs? Why do certain labour markets behave differently to others? After all, a plentiful supply of labour should drive down the price of that labour. Yet in many areas, finance, the legal profession, professional sport and for those running top companies, the opposite seems to happen.
In the case of senior executive remuneration, the recent DTI consultation ‘Rewards for Failure’ Directors’ Remuneration – Contracts, Performance and Severance has emphasised the considerable disquiet felt by many over the way in which chief executives, and to a certain extent other board-level directors, have continued to be well-remunerated even when by any objective measure they could have been deemed to have failed.
The contrast between those chief executives who have walked away from their companies with multimillion pound pay-offs, despite their perceived poor performance, and what happens to every other group of worker when they fail has struck many individuals and organisations, including both the Trades Union Congress (TUC) and the Confederation of British Industry (CBI), as a little odd.'
For people at the top of private companies there are three main reasons given for why they deserve to be so well rewarded:
1. The risks they bear in taking the position of CEO.
2. The fact that they are more talented and have more responsibility than anyone else.
3. The fact that they are working in a global labour market where Adam Smith’s invisible hand of market forces is at work setting pay levels and contract terms on an ever upward spiral.
This short report will examine in more detail the third of those claims. The second claim listed above needs closer examination. People who run things, with one or two exceptions, will tend to be confident, intelligent, articulate people. However, they will almost certainly not be the only confident, intelligent or articulate people who could be doing the job. They also have an X factor. They are in the right place at the right time. They have built up the right networks. In short they have often been lucky. If it helps, think John Smith and Tony Blair.
Linked to the idea of exceptionalism is the idea of the leader as visionary. Visionary leaders are how CEOs would like to see themselves, and how most would like us to see them. But in reality, for every Branson there are 100 bureaucrats. Indeed, as Porras and Collins argue in Built to Last, visionary leaders can often be detrimental to a company’s health – to quote them verbatim: ‘Far better to be a clock maker than a time teller.’
We live in an age when the cult of the leader is ever-present. From sporting heroes to fictional leaders in blockbusting films to business chiefs, all such leaders have characteristics in common: they are risk takers; they create a vision that others want to follow; they keep going where others would stop; they are decisive. I could go on.
Yet as Dr Michael Hammer has argued at length, most corporate leaders are nothing like this. They are stewards not change agents, administrators not leaders. The culture of too many businesses is too often the opposite of that they portray.'
Most CEO's prefer deal-making and mergers to boost short-term share price to the hard grind of managing their companies. There is no shortage of able people eager to do the job.
According to Isles, the median salary of FTSE-100 top executives has grown by 92% in the last 10 years to £579,000, while inflation rose only by 25%. In 2001, when the value of top companies fell by 16%, top executives gave themselves a 12% increase in pay, with bonuses up by 34%.
Isles says that there is an inconsequential global market in British managers. Others don't hire UK managers and vice-versa: 86% of FTSE CEOs come from the UK, another 6% from the EU (many from Ireland) and 8% from the US and the rest of the world. Furthermore, most businesses don't hire their CEOs from outside their companies. Some two thirds of FTSE CEOs were home-grown from within their companies. So why is their pay rising when there is no hot market out there? US CEO salaries are 10 times higher than the UK's. But French and German CEOs are paid less, although their companies' productivity is 20% higher.
Isles says that organisations are microcosms of wider society. In the world of the typical organisation, large pay differentials demotivate and demoralise. If the chief executive is being paid many times more than the average remuneration in an organisation, it sends out a powerful, and arguably negative, message. He refers to a 2003 survey which shows that overpaying people at the top of the organisation damages, rather than enhances, the performance of organisations through lowering morale and reducing commitment. The survey found that 96% of respondents believed that overpaying top executives led to poor employee relations. When the differential between top and average wages in a firm exceeds 14, morale will begin to slide. It is also the case that overpaying creates a ‘top pay club’, entry to which is very difficult for those not earning that level of income already. This perverse outcome results directly from market failure. Paying people too much is a form of market failure. And when the arguments for so doing are flawed, then that market failure becomes starker still.
During the stockmarket boom which peaked in March 2000, the business media generally acted as recyclers of PR bumph on business leaders who were fawned on as the heroes of the new revolutionary age. Many CEO's were deluded into thinking that they had superhuman qualities and they naturally demanded compensation consistent with their exalted status. The Time Magazine issue of May 3, 2004 suggests that anodyne business journalism is still the easier option to cold objective analysis. In a two-page feature headed: A Model Executive-THE FIX-IT MAN with the tagline: HE PULLED VIVENDI BACK FROM THE BRINK OF RUIN. HERE'S WHY JEAN-RENE FOURTOU IS THE SHARPEST CEO IN EUROPE RIGHT NOW, Peter Gumbel recounts how the French-American conglomerate was saved following the ousting of the onetime hero Jean-Marie Messier. Fourtou isn't to blame for this hagiography as he says that he has been 'incredibly lucky.' Selling off $10 billion in assets and reducing the group's debt by two-thirds is quite an achievement but the suggestion of the introduction that Fourtou is a manager with unique skills, is not supported by the content. Rather than buying this journalistic pap, why not wonder that there's a CEO of an entrepreneurial firm in Bavaria or the West of Ireland who is working on an innovation that may provide a technological breakthrough in coming years that eclipses a job that should be in the grasp of many competent managers?
In Ireland there has been much recent interest in the pay of RTE's (Ireland's State owned broadcaster) radio and TV presenters, which the station has reluctantly published. It is interesting how listeners and viewers react when competent substitutes take over during the summer holiday period. There are programmes where the format is the key driver of audience appeal and the absence of the regular presenter can have little impact while there are a small number of programmes where the presenter is a critical part of the audience appeal. Contrast the popular Liveline phone-in radio programme and the radio politics programme, Tonight with Vincent Browne. The personality of the presenter Vincent Browne, one of Ireland's most prominent journalists, has been critical to the latter programme's success. As to pay differentials in the RTE organisation, there are a number of obvious ones that must result in a lot of resentment.
We will give the last work to Nick Isles of the UK's Work Foundation: 'Who gets paid what is probably the most contentious issue that any organisation will face in managing its people. Most of us think we deserve more, but only a few of us will ever receive it. However, for a very small number large rewards are on offer. For those operating in winner-take-all situations, such as top sports stars or even national lottery winners, the sums can be astronomical. Fortune and obvious talent are understood as reasons for someone to be wealthy. So too is entrepreneurial verve and elan. People understand the rewards accruing to a Dyson or a Branson. What the government, the CBI, the TUC and everyone else do not understand is payment for failure. Companies need great people to run them. Great companies nurture, develop and reward those people well. Greed doesn’t, and shouldn’t, come into it.'
- Michael Hennigan
Our Comment feature has been incorporated in the:
Finfacts Ireland News & Comment Service
from October 2004