Excessive executive salaries are not good business

By MICHAEL BERKOWITZ
October 26, 2011 22:40

The idea that there exists a natural aristocracy of top executives is as repugnant as it is unsupported.

4 minute read.



Occupy Wall Street protester

Occupy Wall Street 311 R. (photo credit: REUTERS/Shannon Stapleton )

“Male and female are the distinctions of nature, good and bad the distinctions of Heaven; but how a race of men came into the world so exalted above the rest, and distinguished like some new species, is worth inquiring into, and whether they are the means of happiness or of misery to mankind.” – Thomas Paine

Awhile back I received an email inviting me – as the owner of a tiny slice of Verizon – to vote on a double handful of proposals for its upcoming shareholders’ meeting.

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Mostly I abstained (having – for instance – no clue about this-or-that proposed board member). On a couple of issues I approved the board’s recommendations.

Then there was the shareholder proposal to place certain limits on the compensation that could be offered to Verizon’s top executives.

Predictably, the board opposed the measure.

The reasons fell somewhere short of coherence, but included the classic, “the compensation opportunities provided to Verizon’s senior executives should be competitive with Verizon’s peer companies.”

This would make sense were there an insufficient pool of applicants who could successfully run Verizon or any of its peers.

Verizon would then have to compete with those peers to attract and retain one of these applicants. I would call that situation “imaginary” – except that I can’t even imagine it.

Let’s examine some of the things that would have to be true to make such a situation real:

• A company’s top executives account, to a significant degree, for its success. (I can see how this idea would be attractive to conspiracy theorists and those with a visceral respect for authority. By the same token I find it as likely as the Illuminati really running the world or the secretary of education determining the outcome of my child’s schooling).

• The effect these executives have on a company’s success is deliberate. (If their decisions are crucial, but they make them by tossing coins, we can hire a coin-tosser for considerably less.);

• One can recognize which people are likely to take the actions that are likely to increase the chance of success;

• The pool of these people is small enough, relative to the number of companies wanting to hire them, to bid their price up. Together with the previous item, this means that our ability to evaluate people for executive ability is so fine that we can be confident in our decision to pay twenty times as much to a candidate on our short list as we would pay anyone who didn’t make the cut (the very idea of a small pool that can command huge salaries assumes that the salary spectrum is not continuous);

• The difference in salary couldn’t be used in ways that are more likely to enhance the chance of success. That is to say, the $10 million executive is innately worth more than twenty $500,000 executives, and more than 500 line workers.

PERSONALLY, I think the items on the list range from the improbable to the wildly improbable, but I could be wrong. Compensation committees, though, should be pretty darned confident that all the above are true before spending millions on an executive. Remember, we’re in a bottom-line, no-nonsense, dog-eat-dog business.

How else could we justify sending hundreds of jobs overseas? For whatever my shares are worth, I’d frankly rather not have such people making decisions about my money.

Now, I’ve heard some subscribers to the “heroic” theory of executives compare them to sports stars and industrialists, but all they really have in common are their incomes, which is rather circular.

Baseball players demonstrate ability in an artificially narrow domain, where the connection between hitting a home run and winning a game is obvious. Similarly, the sales of golf clubs with Tiger Woods’ signature can easily be compared to others, so the value of his endorsement, too, is demonstrable.

Industrialists’ incomes aren’t determined by committee; whatever their competence, they make their money by selling things that are theirs.

In short, people who make these comparisons are confusing the issue of income disparity with the issue of executive compensation.

One needn’t subscribe to the belief that no one should be super-rich to see that there’s no business sense in paying multi-million-dollar salaries to top executives.

Initiatives to legislate salary caps are currently somewhat in vogue. I’m not in favor of such legislation, any more than I favor the government stepping in to prevent other stupid behavior. Freedom includes the freedom to err. (Also, I don’t assume the people implementing such policies to be any more competent that the ones they’re overseeing.) But the idea that there exists this natural aristocracy of top executives is as repugnant as it is unsupported, and I for one intend to keep voting my few shares in that direction.

The writer is a veteran software professional, educational activist and sometime entrepreneur. He blogs at http://toologicalforsafety.blogspot.com.


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