The Week in Ethics: The Hidden Costs in Excessive Executive Compensation

The recently released Wall Street Journal’s CEO Pay Survey, the New York Times Executive Pay tables and other headlines about CEO pay increases found in proxy statements brought home again how the extreme imbalance of CEO pay compared to their employees’ can undermine a corporate culture, especially where values like trust, loyalty, and fairness matter. For years, the multiple of CEO compensation in public companies in the U.S. relative to the average worker has been talked about as around 300 to one, with the CEO often earning in a day what his or her average employee earns in a year. How can boards of directors think that is justifiable?

Whole Foods has gained attention for having a 19-to-one ratio for executive compensation. John Mackie, Chairman and CEO of Whole Foods wrote recently that because of the great pay gap between leaders and the led, employee morale, loyalty, and strategy and execution are suffering at American companies.  Mackie claims Whole Foods has not lost employees it wanted to keep because of higher salaries elsewhere. He believes that once basic financial needs are met, “deeper purpose, personal growth, self-actualization, and caring relationships provide very powerful motivations and are more important than financial compensation for creating both loyalty and a high performing organization.”

Boards of directors get carried away by what they believe they need to do financially to reward and keep top executives; in doing so, they create a seismic disconnect within the company, especially given the economic times. And especially when the company lacks the resources to acknowledge employees for great work at all levels of the organization.

Directors in companies in Europe and other parts of the world have a far smaller CEO compensation ratio to average worker salary than does the United States. However, it is creeping upward, influenced by what has been going on in America.  U.S. directors are driving a movement of  widening disparity between salaries at all levels and the CEO; the repercussions of this is like isolating the head from the backbone.

Irene Rosenfeld was among the CEOs in 2009 rewarded by her board with a significant increase in compensation, 41 percent; this included increasing her pension 55 percent to $4.2 million. One of her “achievements” was the hostile takeover of Cadbury.

Kraft has recently told 3,600 of Cadbury employees who are in a special pension plan that they will face a three-year pay freeze unless they opt out of that plan into another Cadbury plan that is less costly.

The timing here is awkward, at best.

There may be justification for Rosenfeld’s pension increase. How the pension issue plays with Kraft employees will depend on how they are affected by pension rules. However, to a few thousand Cadbury employees this CEO perk has got to rankle. These are the very issues of perceived fairness that create distrust especially in a merger of cultures.

Kraft’s directors have adopted and expanded on the employee code of conduct to guide their behavior. One of the first values is earning and keeping trust of its stakeholders, including employees. It is an important document for directors to keep on the front burner.

Rosenfeld has achieved great success in her time at Kraft. She has set very ambitious financial targets. She also faces all the challenges of leading the world’s No. 2 food company, including  the addition of debt from the purchase of Cadbury to retire. Not to mention the need to re-establish goodwill with the British government – wary about Kraft’s reneging a week after buying Cadbury on a promise to keep a particular plant open in England.

Kraft is but one example.

The imbalance in CEO compensation creates hidden costs that can come due when a company can least afford to pay them. Do boards of directors even consider the impact of executive compensation awards on a corporate culture? Do directors take the time to know what the ratio in their company is of average employee salary to CEO compensation? Do they consider how their actions might, no matter how well intentioned, erode trust in the organization?

Kenneth R. Feinberg, Special Master for TARP Executive Compensation, said recently, “Compensation is not simply about material gain or greed….compensation is, to most people, about self-worth.”

As long as one’s self worth is tied to title and income, can one ever be rich enough? “Enough” then has no boundaries. And the mirror used to tell what is reasonable and appropriate in a given organization has long since lost its reflection.

Gael O’Brien, April 4, 2010

The Week in Ethics


4 thoughts on “The Week in Ethics: The Hidden Costs in Excessive Executive Compensation

  1. Pingback: The Week in Ethics: Gordon Gekko, Trust, and Corporate Culture « Gael O’Brien The Week in Ethics: Columns on Ethics, Leadership and Life

  2. Pingback: Hayes: We Are No Longer Able To Tax The Very Rich In Our Country - Page 9 - US Message Board - Political Discussion Forum

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