I joke to people I have two strategies. The first strategy is to win the lottery. If that fails, strategy number two is to find a job. Both could happen. I could win the job lottery. A lot of people have won the job lottery. Chris Galvin, CEO and Chairman of the Board of Motorola won. Motorola’s performance, measured by revenue growth ($29 billion in 1998, $30 billion in 2001), or earnings growth (a loss of $1 billion in 1998 a loss of $4 billion in 2001), or employment (133,000 in 1998, 113,000 in 2001) or stock price growth ($20.35 in 1998, $15.02 in 2001) over the past four years speaks for itself. But he is still employed and in 2000 pulled down $2.5 million. His qualifications: son of the founder. Jeff Skilling won the job lottery. Jonathan Goldsmith won the job lottery. They also won the great pension lottery and the medical and dental benefits for life lottery.
The intellectual rationale for large paychecks is based on the assumption that the superior talent to manage a company requires superior compensation. This is hard to reconcile with the failure of Enron, AT&T, Global Crossing, Lucent, KMart etc., or the poor performance of a company like Motorola.
The intellectual underpinning for high executive compensation has also been twisted by greedy management, lazy boards, and uncaring shareholders into an asymmetric win/win situation for management. Consider one of the more egregious examples of the day, Enron.
We all know the story. Enron at its peak was the seventh largest company in the US. In order to attract the superior management talent to accomplish this feat, Enron paid Kenneth Lay $1.2 million to $1.3 million per year in salary between 1997-2000. In addition, it granted Mr. Lay options worth millions of dollars over that same time period. In theory, Mr. Lay was worth this due to his strategic acuity and superior management abilities.
But if we credit Mr. Lay for the success of Enron, then we must also lay the blame for its collapse at his doorstep. And if we do that, then according to Secretary O’Neil, he must pay for his poor decisions, as that is the genius of capitalism. This, of course, is far from the case. Instead, Mr. Lay is handsomely rewarded for this failure with a severance package worth $21 million times the number of years left under his contract, which goes until 2005. Even more inexplicable is receiving board support to bring Enron out of bankruptcy, when he was in charge during the time management drove it into bankruptcy.
Mr. Lay has exposed the soft underbelly of the high executive compensation argument. He now claims he was unaware of the financial legerdemain that drove Enron into bankruptcy. However, for years he was both Chairman of the Board and Chief Executive Officer. Let’s take him at his word that he did not know what was happening. However, since his job was to know what was going on, he seems to be admitting he was incompetent. If he was incompetent, why then the outsized financial compensation? After all, the reason for paying such large salaries, granting options and golden severance packages is to attract the best and the brightest to run public companies. Since Mr. Lay, by his own admission, was incompetent, why did Enron continue to employ him? Why did he continue to receive such a large salary? Why is he entitled to a large severance package?
One counter-argument to this could be that we should not indict the entire system due to the failing of one, rather large, company. Enron is not, however, an isolated incident. Executives are rewarded for success, but contrary to Secretary O’Neil’s belief, are not punished for failure. As the investors in Enron’s 401K and the laid off staff has discovered, they, not management, are punished for management incompetence, or greed or theft.
This is the Osama bin Laden school of management. If the campaign is a success, bin Laden wins big. If the campaign is a failure, the front line loses its life, and bin Laden is protected.
There are cases where management forgoes bonuses when business turns down. There are even those cases where management takes a pay-cut when workers are laid off. This is a charade. When times turn good again, management demands options, bonuses and pay raises to compensate them for the losses in the down cycle. And since they determine the compensation, it is no surprise they are made whole. But after all, this is necessary since how can a company attract superior management unless it is willing to compensate them highly for their skills.
In essence companies forget about the bad times and reward handsomely during the good times. Shareholders, boards and managements like to think declines in their fortunes are due to exogenous factors while their success is due to their superior abilities. Non-executives are not so lucky. In good times they are hired and retained. In bad times they are fired.
Swimming Across the Hudson