Yves here. The title of this piece is somewhat misleading, but it still serves to introduce a sadly perennial topic, that the CEOs of public companies are paid well in excess of their actual worth. Author Sam Pizzigati briefly describes how top executive compensation continues at a lofty level that defies conventional economic logic, and then tries to depict the bossless organization as an alternative.
We’ve discussed this subject repeatedly over the years, featuring proposals such as a maximum wage (see this 2011 post by Doug Smith as an example), documenting how the egregious rewards became institutionalized (the roots go back to the 1980s LBO boom and the way top executives in those companies got obscene rewards for being the front men for leverage plus financial engineering plus low-hanging-fruit cost cutting), and debunking the notion that CEO lucre is necessary for “performance”.
For instance, studies have found the most lavishly paid CEOs underperform (we are looking at you, Larry Fink). Jim Collins, in his classic Good to Great, instructed his team to stringently avoid making the book at all consider CEO character, but his resesarchers came back and insisted otherwise. Collins was out to find sustained outperformers, as companies that did better than their industry peers for IIRC 15 years. The team found that these CEOs were the polar opposite of the Jack Welch media star model. They took modest pay, did not take credit for success (they made a point of sharing it with their team), did take the blame for failures, and didn’t spend time currying a public profile.
The board/corporate headhunter preference for top executives who appeal to Wall Street analysts has become so pronounced that I wonder if any of the type that Collins singled out as extremely effective still exist in the wild. So it may be impossible to prove whether his thesis still holds true.
And a critical, and stunningly neglected factor in how CEO remuneration keeps going up and up and up is the way those corporate recruiters collude with boards via typically also providing compensation surveys and recommendations. That occurs in the context of screening and hiring new CEOs and in periodic revisions of compensation levels (remember board benefit over time because director fees march upwards in parallel with escalating executive pay).
Needless to say, it is a source of considerable frustration that I have yet to see anyone finger arguably the key mechanism that assures more and more executive looting. From a 2008 post:
While most commentators on CEO pay correctly focus on the role of options-based rewards in goosing pay from generous to stratospheric, the role of compensation consultants seldom gets the attention it merits.
One practice that I have seen get perilous little mention is where the pay targets are set. Based on their belief of what constitutes good modern practice (influenced in no small degree by the pay consultants) most boards set general target ranges for how they would like the CEO to be paid relative to peers. The comp consultant then helps define and survey the peer group’s pay ranges, setting a benchmark for how the CEO in question is to be paid.
That all sounds fine, right? Well, except just as all the children at Lake Wobegone are above average, no board likes setting a target below peer group norms. I have heard of numerous examples of targets being set somewhere in the top half (66th percentile, top quarter, top 20%), hardly any at the mean, and none I know of below average (although GE’s Jeff Immelt set his pay at a remarkably modest level, saying it was bad for morale and inappropriate for the CEO to be paid vastly more than other C-level executives). If readers know of any examples of companies (other than those with substantially owned by insiders) where the target for CEO pay is below the median of comparable companies, please let me know.
So with this mechanism in place, any CEO who has fallen below median pay who is targeted to be in a higher group will have his pay ratcheted up, independent of performance, merely to keep up with his peers, This increase raises the average and creates new laggards. The comp consultants have institutionalized a leapfrogging process that keeps them busy surveying competitor reward levels and keeps top-level pay rising relentlessly.
And there seems to be a creep in cultural values that accepts, nay endorses, the opposite process at work further down the food chain.
And as we pointed out in that post, we have a double standard as far as other workers are concerned:
Consider the way in which views that are contrary to most wage earners’ interests have been internalized (or at least are promulgated in the media). One meme I have noticed surfacing in the debate over the automaker bailout is that UAW employees are paid more than average workers.
Now in and of itself, that statement is meaningless. You need to have an idea of worker productivity to see whether that it out of whack (and for some odd reason, the bloated and highly paid management cohort almost never gets mentioned in these discussions, nor do the massive state level subsidies to the foreign transplants). Perhaps I missed it, but I do not recall seeing any longitudinal work on labor costs (that sort of analysis would help bring some badly needed facts to the table).
But why is framing the discussion around averages alone dangerous? Let’s say we collectively want to bring car worker pay down to some sort of average. That has the effect of lowering the average. You will have groups that were formerly at the average that are now above it. And if you accept the implicit logic “above average pay is bad” (fill in the blank as to why), you have a race to the bottom due to pressure on the relatively better paid to take less which puts pressure on aggregate pay.
Back to the current post. It seems remarkable that mechanisms like these are routinely ignored.
To turn to the other focus of the article below: the idea of a bossless organization is appealing, I doubt it scales. Even the famously egalitarian Mondragon has a CEO. But as we have seen in banking, and perhaps other industries, the bulking up of companies via acquisition has little to do with cost savings (banking does not exhibit scale economies beyond a fairly modest size levels) but perverse incentives, particularly that CEO pay correlates with size of organization.
By Sam Pizzigati, veteran labor journalist and Institute for Policy Studies associate fellow, edits Inequality.org. His recent books include: The Case for a Maximum Wage (2018) and The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970 (2012). Originally published at Common Dreams
Do our corporate CEOs deserve all those millions they annually pocket? Can a modern economy somehow survive without the “incentive” these megamillions provide? Do we, in effect, need our top corporate bosses pocketing more in a day than their workers can take home in a year?
We’ve been asking—as a society—questions like these ever since CEO paychecks started soaring in the late 1970s. Back in the 1960s, America’s CEOs averaged about 20 times what their workers were taking home. Today’s CEOs, analysts at the Economic Policy Institutedetailed last October, routinely pocket 400 times and more what their workers are making.
In 2022, adds a recently released AFL-CIO Executive Paywatch report, CEOs at S&P 500 companies averaged $16.7 million in total compensation, their second-highest pay level ever, at the same time U.S. worker real hourly wages were falling for the second year in a row.
Jumbo executive take-homes, as an Inequality.org guide to academic research on CEO pay helps us see, continue to breed organizational dysfunction. “Pay for performance” jackpots essentially give top execs a never-ending incentive to pump up profits by any means necessary. Instead of making investments that can help workforces become more productive, execs are simply doing whatever they can to inflate their share prices—and enrich themselves in the process.
Between 1947 and 1999, nonfinancial U.S. companies shelled out an average 19.6% of their operating cashflow to shareholders, notes economist Andrew Smithers. The second half of that half-century saw stock options become an ever more dominant source of corporate CEO compensation. The 21st-century result? Between 2000 and 2017, the Smithers research finds, the average corporate cashflow to shareholders more than doubled to 40.7%.
Other analyses focus on the psychological consequences of huge pay gaps between workers and top execs. At corporations with these wide gaps, S&P 500 analyst Scott Chan’s research suggests, “the big boss regards employees as tools, not as valued team members.” Wide pay gaps create work environments, Chan adds, where employees “don’t feel valued and so don’t do their best.”
“We think in particular,” as the chief of Norway’s $1.3 trillion sovereign wealth investment fund toldBloomberg TVearlier this year, that “in the U.S. the corporate greed has just gone too far.”
But that executive greed—despite the spotlight on it—seems as entrenched as ever. And that reality has some analysts going beyond attacking how much our corporate chiefs execs make. These critics are increasingly wondering whether we need these chiefs at all.
This “bossless narrative,” the University of Manchester Business School’s Matthew McCaffrey writes in a forthcoming issue of the Journal of Entrepreneurship and Public Policy, has actually been around for generations and, in the 19th century, helped nurture the cooperative movement. This narrative has become “especially popular over the last thirty years,” with a “growing literature seeking to understand the unique strengths and weaknesses of bossless organization.”
“Bosslessness” can come in a variety of shapes and sizes. At the more modest end, enterprises can move in a bossless direction by eliminating management levels and “delayering” their operations. More ambitious “flattening” efforts, McCaffrey relates, can replace “traditional managerial authority” with “self-organizing teams” that “choose their own projects” and decide—democratically—the tasks their firm will pursue.
Flatter companies, McCaffery believes, “can and do succeed in the right circumstances,” and he sees his own new scholarly work as an exploratory attempt to identify those circumstances that can “encourage experimentation with bossless models.” These circumstances, he notes, can vary. In stagnating industries, for instance, “reducing management hierarchy may be the only viable strategy” for firms with “increasingly slim” profit margins.
Moves that governments make, McCaffery points out, can also “make bossless firms more feasible than they would be under conditions of no intervention.” The world’s most famous cooperative network, Spain’s Mondragon, rests on a credit union operation that made funds available to emerging new co-ops. Spanish law allowed this Mondragon credit union to pay “slightly higher interest” rates than banks, a policy that encouraged savers to use it.
Another example comes from the Netherlands where the Dutch company Buurtzorg Nederland revolves around “teams of self-organizing nurses to provide home health care across the country.” This 17-year-old company has taken advantage of “the bureaucratization and inefficiency of many Dutch healthcare companies” that McCaffery, a fellow at the libertarian Mises Institute, chalks up to the Dutch government’s regulation of the healthcare industry.
McCaffery, as this example illustrates, comes at the study of organizational “flatness” from a distinctly non-left, “free market” perspective. But his interest in “low- or no-hierarchy organizations” bodes well for attempts to create alternatives to corporations that essentially exist to “manufacture” mega-rich CEOs.
The emerging “debate about the bossless company,” McCaffery concludes, reflects a growing public skepticism “about the value of managers and hierarchies as such.” This skepticism, he adds, “involves questioning essential principles of economics and management that can justly be said to underpin much of what goes on in the global economy.”
Analyzing—and changing—that “what goes on” may well bring together some strange political bedfellows.