Are Corporate Executives Expendable?

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 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 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.

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  1. ambrit

    How soon we forget.
    W. Edwards Deming was called in by Shogun MacArthur after the end of WW-2 to redesign the Japanese economy. The result was the Japanese Miracle of the 1950s and 1960s. Deming is supposed to have prescribed limits on Japanese management to shop floor worker pay gaps. The issue is murky.
    Tellingly, Deming’s methods were rejected by American businesses.
    Japan organized their economy around mass social values. America adopted an Individualist ethos.
    The results of those choices are bedeviling America today.
    Japan pay:
    Finally, as any experienced “leader” can tell you, everyone is expendable. It just takes the right set of circumstances to remove a CEO.

    1. The Rev Kev

      Before WW2, stuff that was exported out of Japan was basically junk but after the war, W. Edwards Deming told the Japanese that if they concentrated on quality, that the world would beat a path to their door. The rest is history. But back then the Japanese CEOs would do things differently. If you had a company conference in the west, the CEO would give his opinion first and amazingly all the senior and junior execs on down would agree that he had it right in his analysis and agree with them. In Japan, the janitor, I repeat, the janitor would give his opinion first. Then the line workers, then the supervisors and then right up to the head honcho. By the time it came to the CEO, he had an exact idea of what was going on in his company and had people bring up thoughts that may have not occurred to him so then he had much greater latitude in his final decision. Also, in this era if pay cuts had to be made, it went in the reverse direction. First the CEO got a pay cut, then the senior execs, then the junior execs on down. Last I heard though, I believe that the Japanese were adopting American managerial ideas.

      1. digi_owl

        It is a bit of a generational clash from what i have been reading.

        With the older lamenting that the younger are adopting foreign values and behaviors over Japanese. That said, Japan is the nation that gave us death by overwork (karoshi?).

        And i don’t think all of it can be ascribed to post-ww2 Japan and American “influence”. After all, Japan has a concept, giri, that dates to well into the feudal era. Something like the reciprocal obligations between a lord and their serfs.

        In a sense what we are seeing is a nation that thanks to going from feudal to industrial capitalism in the span of a generation, has carried some of those feudal ideas into the business world. Including that the bosses has a civic duty to take care of the workforce. But also that in turn the workers have a duty to dedicate their lives to the company.

      2. jo6pac

        Yes, Toyota did Amerikan management that ruined cars for about 10yrs and a senior family member took over then the grandson who worked on the floor as his first job. I do believe he step down a few years ago and is still CofB

        1. digi_owl

          What is that saying again? Three generations from riches to rags?

          Something about the first generation builds, second maintains, and third squander because they do not value.

          1. jo6pac

            third squander because they do not value.

            At the time there was no family member ready so sadly they turned it over to former GM people. The new team is Japanese and have done some EV work but say they have designed a capacitor system and if they have it will be way above everyone else. 2024 the car will be in show rooms

    2. John

      I was a member of a team that supported Dr. Deming during one of his last projects (87-early 90s). Deming was credited with Ford’s turnaround by Don Peterson. We would do well to install Deming’s thinking, methods and the Principles in our businesses. E.g. a colleague, who worked with Dr. Juran, and I were hired to do a “leadership program” for a publicly traded company. We found that “leaders” had no idea how their respective functions worked and couldn’t map out the processes they were supposedly responsible for.
      But we talk nonstop about bringing manufacturing back to the US and AI will of course substitute for operational insight and capability.

      1. digi_owl

        AI running businesses, they have been trying to make that happen since the 70s.

        Instead computers have taken over almost all other company operations.

        1. Synoia

          We don’t need artificial intelligence. We need real intelligence, which is in very short supply.

  2. Hayek's Heelbiter

    Solution: Eisenhower Marginal Tax Rates of 91% for any compensation over $1M. Note to self: What dream world do you live in?

  3. diptherio

    Mondragon is not particularly egalitarian, at least for worker cooperatives. Last I heard, their highest paid execs make 9X as much as the lowest paid (member) worker. A much more egalitarian co-op conglomerate is Cecosesola in Venezuela. They are large, do a lot of different things (from healthcare to agriculture) and they have a structure and way of operating that is so radically non-hierarchical that it’s hard to believe it works at all, from the American perspective. But it does, and pretty darn well, by all accounts. Much of what is possible in terms of enterprise structure comes down much more to cultural elements than economic ones, imho.

    1. digi_owl

      I think i have read somewhere that 10x between CEO and the lowest employee is the max before discontent starts brewing.

      And it is still far better than the 100x or perhaps even 1000x that some tech companies etc are at.

      1. JBird4049

        IIRC, in the 1960s, it was an average of 30-1in American corporations including Automakers.

      2. J7915

        IIRC read somewhere Cicero postulated that beyond one to10 ratio of income/wealth societies become subject to instability.

  4. Alice X

    I am reminded of the American journalist who later remarked on her stay at a hotel in 1936 Barcelona that the place seemed to be run by the bell hops and the maids. Or something like that. That was the anarchist CNT. One can dream.

  5. Lexx

    This morning I was reading a review of ‘Painkiller’ and Mathew Broderick’s turn at playing ‘Richard Sackler’ and wondering again why we focus on CEO’s when assigning blame (or discussing their compensation) and not every minion in the company? Had Richard ever made a pill of any kind in his life, or any of the Sacklers? Where’s the fingers pointing at the massive complicity and I think, the shared blame for the entirety of Purdue? Why do we only hold accountable (if possible) the ones with the biggest bucks, while the employees cranking out those pills by the millions get a pass? Every minion downward is sitting in the catbird seat. The C-suite is nearly as well compensated but much less likely to be publicly scorched in the press.
    Outside of Wall Street, we don’t hear their names mentioned in the press until the company implodes and yet they’re guilty of carrying out heinous crimes against their customers, and humanity. Where’s their Hague?

    ‘But…but…but…I’m just doing my job!’ If the corporate structure is flattened or eliminated, does that mean everyone who works for that company is liable?

    1. ambrit

      As I have been known to remark in the past; “People were hanged at Nuremburg for claiming to have been ‘just following orders.'”
      Then we realize that, at the same time that the Nuremburg Trials were going on, ‘Operation Paperclip’ was bringing equally guilty National Socialist technicians and thinkers over to America. Others, like Gehlen, were turned right around in place and put to work for the Allies doing the same jobs they had been doing during the War.
      Holding anyone, much less an entire organization, to account for crimes committed is a purely political decision.
      Years ago, a precis of the Art of Politics went something like; “Keep them fat, happy, and dumb, and you can do anything you like with them.”
      Today, having lost the fear of the population that should be natural to any self respecting socio-political organization, the Neos have adopted the attitude of; “Keep them dumb and you can do anything you like with them.” Alas for the Neos, ‘Dumb’ will get you only so far. Even the ‘dumbest’ of us knows when they are hungry. When we begin to starve, all bets are off. Just look at how many of the Arab Spring revolts began.

  6. Paul Art

    As long as we have Chuck Schumer and Nancy Pelosi (with sock Puppet Hakim J), as long as we have ‘moderate’ Democrats and as long as we have the current Corporate Democrat party, CEO and their pay will be highly protected.

  7. Steve Ruis

    There is a way to close the “gap” as it were. Since it is a rare CEO who actually earns the largess lavished upon him, here is how to roll back the issue. Step 1 Fire the current CEO for “underperformance,” therefore no golden parachute, no negotiations, etc. Step 2 Offer the job to the First VP . . . for half the salary. If they decline, go to the Second VP and make the same offer. Eventually you will have a CEO at half of the remuneration.

    If that CEO underperforms, well . . . rinse and repeat.

    Now some claim that such tactics, a la Jack Welch, will prevent your corporation from attracting the top talent, and I suggest that you ask yourself “Have we ever attracted the top talent?” “Has who we hired ever overperformed?” I suggest that both answers will be no. So, there is no need to soup up the family car to compete in NASCAR races because you do not compete in NASCAR races.

    Some of the execs you currently have will take your offer merely because they want to have CEO on their resume. And I think you can make it clear that if they want to keep that position, they need to perform at or above standard. Otherwise, you go to their First VP and. . . .

  8. Susan the other

    Maybe not so much expendable as counterproductive in a world that is beginning to blame capitalist competition and obscene profits for “over-production” problems. Over-production which gets morphed into ridiculous paychecks as the reward, the incentive. Because the environment can no longer support all that greed and destruction for the sake of profits. I could see the logic of obscenely high compensation for execs that run sustainable enterprises that protect and repair Nature, and support social entitlements, but I fail to see where that money comes from in a world winding down from exponential over-consumption. We already ate the cake.

    1. Susan the other

      So maybe thinking that there is profit in prevention, as in the prevention of destruction, could also translate into a compensation system based on the inherent values of conservation. Why not? It is the same thing as investing long-term, right? I can even imagine that we could account for it in a balanced way.

      1. ambrit

        “I can even imagine that we could account for it in a balanced way.”
        And therein lies the basic problem. The present ‘system’ is based upon “Out of Balance” as the touchstone for decision making. Many here will recognize that Corporate Capitalism is now held in thrall to the Quarterly Earnings Report. How to ‘fix’ that problem will be a task worthy of being called a “New Labour of Hercules.” Say, something like “Cleaning out the Wall Street Casino Stables.” In this version of the story, Hercules must stop the River of Money from running into the Casino stables.
        Alas and alack, I see no Hercules anywhere in today’s West. Just a whole lot of Panders and Scarlet Women.

  9. Starry Gordon

    An emphasis on the acquisition of money, power, and connections regardless of the production of value seems to be exactly what most better-off Americans want, so it is hardly surprising if the aligned behaviors show up in corporate life (or anywhere else). Politics grows out of daily life; it does not fall from Mars. A practical determination to obtain value from our economy would require revolutionary thinking and action.

  10. Glen

    Am interesting discussion of “welfare capitalism” and how CEOs changed (and pretty much came to embody “greed is good”):

    Why Jack Welch Lives Rent Free In CEO’s Minds

    Sam and Emma host David Gelles, a climate reporter for the New York Times, to discuss his recent book The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America-and How to Undo His Legacy.

  11. Matthew G. Saroff

    Not only expendable, but replaceable by the current level of scam artificial intelligence with no one noticing.

    Heck, you could replace them with a very good parrot, or the talking toaster from Red Dwarf and get better results.

  12. KenInMN

    My offer to corporate America still stands: I will gladly run your company into the ground for half the price your current CEO is running your company into the ground…

  13. Gulag

    The issue of the viability of the bossless company as an organizing vision is entangled with the economic reality that most of us commenting on this blog can probably be described neither as “capitalist” or “working class.”

    We seem to be stuck somewhere in between–most likely in the dreaded Petty Bourgeoisie. This is a category that people from a more traditional Left background are often quite uncomfortable with.

    We tend to work for ourselves.

    As Bourdieu has emphasized, our collective sense of who we are is partially defined by who we are not.

    For example, I have always primarily worked with my mind (self-employed) and not my hands and when returning to my high school community (Green Bay Wisconsin) I often find myself arrogantly thinking I am superior to my former high school buddies who tend to have had more traditional working class jobs (even though some of them make as much or more money than I do).

    In my opinion, it is way past time to take a careful and honest look at the modern petite bourgeoise in the U.S. and what our attitudes, behavior patterns, and status needs truly are and what that may mean for a future politics.

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