Posted tagged ‘CEO Compensation’

The Week in Ethics: Change and the Power of Thinking Differently

January 6, 2012

In 2011, complex issues like social justice, income inequity, unemployment, and corruption were taken to streets around the world in violent and nonviolent marches, riots, and acts of rebellion … leaders and institutions were denounced. The issues weren’t resolved by the stroke of midnight in what has been called the year of the Protester.

What has 2012 inherited? Grave societal problems which continue to fester; the failure of business as usual to address them; and, the need to re-earn trust in order to make systemic changes.

In the United States, it is possible Occupy Wall Street has already made its greatest contribution. The movement tapped into, and gave voice to, the anger, frustration, and distrust felt by untold numbers of Americans impacted by the economic meltdown, who aren’t sure how they will regain their footing and are afraid nothing has really changed to prevent it happening again.

It is also possible Occupy will evolve to become an effective catalyst for change. It could learn a lot from the legacy of the Freedom Riders.

Occupy protesters, in voicing their dissent about the status quo, exposed the discomfort government and institutions have with dissent, the First Amendment notwithstanding. Local government leaders’ response to encampments was about hygiene and public safety (which cost millions of dollars) rather than willingness or ability to engage in nonpartisan forums about the public policy issues marking the protests.

The contrast between what Occupy calls the 99 percent and the 1 percent is particularly dramatized by CEO compensation, a disparity that has been an issue for years. In one study of CEOs, they earn 343 times more than a typical worker.

In 2012, the SEC will require the disclosure of the ratio of CEOs’ total compensation to the median total compensation for all other company employees. The question remains whether the inevitable embarrassment will be the driver to lead CEOs to say “enough” or for directors to modify compensation awards.

The concept of two distinct societies is reminiscent of the disparities Michael Harrington pointed out in The Other America: Poverty in the United States which was a catalyst for the antipoverty legislation in the 1960s. The issue now becomes:

  • What kind of meaningful social and economic change is possible for this decade?
  • What will be the combination/collaboration of leaders driving change?
  • What will enable leaders to convene the authentic conversation that shifts the business-as-usual gridlock to what needs to be done differently to create change?

We are where we are now because no matter how bad it gets, we adhere, lock step, to business as usual. Two examples from California (where January 5, 2012, after months of talking openly about projected state budget shortfalls, the Governor announced the 2011-2012 budget faces a $9.2 billion problem):

  • At the University of California (UC) campuses tuition has been raised twice this academic year by nearly 18 percent. Nonetheless, last month UC Regents voted to increase the salaries of a dozen administrators (already in the $200,000 range) 6 to 23 percent.
  • In the California State University system (CSU), trustees dismissed protests from students and CA Governor Jerry Brown when they voted both to raise tuition 12 percent this academic year, as well as pay the new president of CSU San Diego $100,000 more than his predecessor, raising his salary to $400,000, the highest in the CSU system.

These kinds of decisions, like Wall Street companies — who received federal bail out money — paying out huge bonuses, all have rationalizations that create the contracts or systems or expectations that lock us into a business-as-usual mentality that only works when everyone is enjoying unprecedented prosperity. It is a strategy that reacts to a piece of the challenge – the well-intentioned desire to attract and retain talented people – while missing, to its peril, the bigger picture of economic reality that calls for different solutions.

There are ways to upend business as usual. Fresno County (CA) School Superintendent Larry Powell knowing budget cuts threatened to decimate county school programs, retired from his $235,000 a year job with 3 years remaining on his contract in an arrangement  that put the more than $800,000 of salary and benefits he would have been paid back into the county’s school districts’ budget.

He was rehired the next day to run the 35 school districts at a salary of $31,020 with no benefits, which he will give to charity. He and his wife determined their financial needs were met with their pensions. He was committed to protecting an anti-bullying program, arts programs and needed teaching positions if more layoffs occurred.

The power of one individual to think differently to create significant change.

Recently, I saw again the commercial Apple did in 1997 when it re-branded itself. It reminds us that in change, paradigms shift, risks are taken, and leaders lead.

Gael O’Brien    January 6, 2012

The Week in Ethics

Gael O’Brien is also a columnist for Business Ethics MagazineHer latest column is “Freedom Riders’ Legacy: Creating a Culture of Common Purpose”

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

April 5, 2010

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


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