Should CEOs who lead high performing organizations be disproportionately compensated for their experience, the value they deliver, the many people whose lives they steward, and the burden of going to sleep every night knowing the buck stops with them? Absolutely. Should everyone pull down fair market value for the work they do? Absolutely.
But something silly is happening, and it has far reaching implications.
CEOs saw their total compensation climb by 876 percent between 1978 and 2012 according to the Keystone Research Center, while worker compensation grew just 5.4% according to the Economic Policy Institute http://huff.to/16CwXq8. In 2012, the highest paid CEO in the US, Larry Ellison from Oracle, made $96.2 million http://cnnmon.ie/10HnrMY. $96.2 million in one year. Let’s do the math. Assuming he worked 100 hours a week, 52 weeks a year, that’s $18,500/hour.
$18,500/hour. Let’s consider the value he delivers.
Oracle makes software which confers competitive advantages to their customers via information and analysis. Their customers include almost every industry, from consumer products to banks to government. What this means in the end is that their clients have the intelligence to inspire us to eat more Doritos, drink more Pepsi, buy more face creams, and generally offer a larger share of our wallet while they drive their costs down.
Leaders with supersize pay proliferate the corporate world and are surprisingly plentiful in not-for-profits as well http://huff.to/12zRdIQ . It’s worth reflecting on the anchor point at the other end of the spectrum. Minimum wage = $7.85/hour.
Does the huge disparity between CEO and front line pay reflect a differential in value delivered or something more pernicious? Can the market value for leadership really be that high, or are we are living through a dot-com-bubble equivalent in the “war for talent”?
The hefty compensation approved by many Boards of Directors sure does smack of a Hail Mary pass: “we’re not sure how this is going to work, but we really hope you can _____[FILL IN THE BLANK]________ (e.g., turn the company around, innovate, be our messiah, just stay because we haven’t found any better alternative)!” Moreover, the people pulling down this kind of compensation must have pretty well-developed egos to keep a straight face on payday. Would they be classifiable narcissists according to the DSM-V http://bit.ly/d0CZcH ? Perhaps, but we’re less interested in judging them than we are in asking the question: what flows down when there is narcissism at the top? Empathy? No way. Sustained innovation? Unlikely.
There are good alternatives to outsized pay for top teams. Some of the money could be used as fuel for innovation/growth/renewal, plowed back into the organization via employee compensation and incentives, or allocated to effective leadership development. Whole Foods is a good example http://huff.to/13Y9lIC. Company policy caps executive pay at 19 times the average employee’s salary. Though the policy only caps salary and not total compensation, co-CEO Walter Robb’s total pay package was a relatively low $1.2 million in 2012. “Earning just 19 times that of a typical worker — which works out to about $453,807 in total salary for Robb — makes him an outlier in today’s corporate culture.”
We’re not the only wealthy country struggling with this issue. On November 24, 2013, Swiss citizens will vote on a referendum for a pay cap of 12:1 for CEOs to the lowest paid employee http://bit.ly/19RskI6. Even more inspiring than government regulations is the leadership example set by Haruka Nishimatsu, the president and CEO of Japan Air, who dropped his pay in 2009 to $90,000 (half that of his airline pilots) to save the company and avoid firing people. He eats in the cafeteria, rides the city bus to work, wears discount suits, and knocked down the walls of his office so anyone can walk in. Nishimatsu says “a CEO doesn’t motivate by how many millions he makes, but by convincing employees you’re all together in the same boat” http://cbsn.ws/60l08x. He runs the world’s 10th largest airline.
Make no mistake, we believe in capital markets as the most effective driver of our economy. It is also vital that executives are at liberty to govern. But what’s the role of leadership in ensuring that our capital markets effect a healthy, innovative culture? What is capitalism with a human face? Answering that question will take some work, but for now, let’s just say, it shouldn’t make us cringe.
What’s it really worth? It’s hard to say, but let me tell you this: according to the Against Malaria Foundation, for $2500, long-lasting insecticide treated bed nets can save the life of a child in malaria-infected developing countries http://bit.ly/LaLAVk.
$96.2 million = 38,480 children’s lives saved. That’s one way of looking at it.
Is Larry Ellison worth it? Is anyone?
Thanks to Eva Basilion and Monica Tanase-Coles for their collaboration on this post.
Picture by Bryan Brandenburg http://bit.ly/19QRIOk