CEO Pay – How We Got Here – Part1

Jekyll Island is one of the Golden Isles off the east coast of Georgia.  In 1886, a group of U.S. “captains of industry” bought the island for $125,000 and established the Jekyll Island Club.  The price sounds cheap today, but was no doubt a large sum of money in 1866.  The group included such well-known names as Frank Henry Goodyear, J. P. Morgan, Joseph Pulitzer and William Rockefeller.  It provided a winter refuge from the cold winters of the north.  There was a Club House as well as individual residences which had ample rooms for both family members as well as servants.  The family servants were  not always required to work as much while they were there. The Rockefeller house, for example, had many family and servants’ rooms but no kitchen.  The meals were all catered in from the Club House so the servants would have no kitchen duty.  On the other hand, there were activities that took place while some of the members were on the island which are said to have changed world events.  In 1910, the first draft of the Federal Reserve Act was drawn up there, and in 1915, the president of AT&T made the first transcontinental telephone call from the island.  By the early 20th century, the Jekyll Island Club members were estimated to have one-sixth of the world’s wealth.  They were the entrepreneurs who began many of what became the Fortune 500 companies of the latter part of the 20th Century.  But by Wold War II, many of these people had retired or moved on.  In 1947, the Island was sold to the state of Georgia for a state park.

In the meantime, there began to be developed a body of knowledge concerning how to manage these large private organizations.  The man who became known as the “father of scientific management”,  Frederick Winslow Taylor, in the early part of the 20th century developed efficient management methods that were successfully introduced into many different industries.  In the 1920s & 1930s Elton Mayo , a Harvard professor, conducted studies in Wester Electric’s Hawthorne manufacturing plant.  The results of his work began the field of human relations in management.  By the 1950s and 60s, the “capitans of industry” who owned Jekyll Island had turned the leadership of their companies over to “professional managers”.  University Schools of Business had developed management training programs based on the growing body of knowledge started by Mayo and Taylor and people who followed them.

At the end of World War II, the U. S. was the premier manufacturing country and we had , we believed, the best-managed companies in the world.  The human relations functions had developed salary administration programs based on job ladders. These job ladders were designed to provide internal consistency between different jobs and among the different levels of management.  The ladders included the CEO’s job which had a salary tied to the lower level positions in the company.  Business schools believed that most reasonably competent people could  be trained to be managers and many company’s had a policy of “promoting from within”.  Most of the senior executives had grown up in their companies.  Though well paid, they did not have the relative wealth or income of the Jekyll Island Club members.  They owned stock in their companies, but the ownership interest of these professional managers was relatively modest compared to the people who founded the companies.  Their annual compensation was mostly salary.  But the companies were doing well and life was good.

All this began to change in the 1970s.  The Japanese who never invaded the U. S. during WWII staged an invasion of sorts in the 1970s.  Japanese products and producers began to dominate  several industries in turn.  Starting with motorcycles and moving to cars and electronic products – such as TV sets – they were taking over industries that we thought we would dominate forever.  Where was it all to end?  Was the U. S. losing its competitive edge?  Were we as good at managing organization that could compete in the world as we thought we were?

By 1972, I had completed an MBA degree with a concentration in management and was a senior analyst in a corporate planning department of a Fortune 50 company.  My business address was 60 Wall Street in New York City and we were a staff department to the CEO.  It was an interesting time and place to be.  With respect to CEO compensation, there are two things that have stayed with me over the years since then.  The first thing was the that the public perception of the large corporations did not quite match what I came to realize was the reality.  My company was an oil and chemical company that was facing the good news and bad news of the steepest run up in energy prices that we had seen in this country since WWII.   The good news was that the earnings were up, the bad news was that we were facing the ire of the U.S Congress which was busy raising taxes on the “windfall profits” of the large oil companies.  The rhetoric was pretty vitriolic in regards to the larger big corporation and their “wealthy overpaid” leaders.  While congress was busy raising taxes on the large companies, they were exempting the smaller “independent” producers.  The irony here was that the CEOs of the large corporations were modestly compensated compared to the independents whose CEOs had a significant ownership interest and personally were no doubt benefiting much more from the run-up in prices.  And CEOs generally were getting “unfairly” vilified for being “extremely rich” when, in truth, “professional managers” weren’t really being compensated nearly that well.  All this however was about to change.

The other thing I remember about that decade were the discussions concerning the relative competitive position of U. S. industry compared to the rest of world and in particular, the Japanese.  There were two primary ideas that kept surfacing in those conversations, which, taken together, no doubt have been primarily responsible for the run up in CEO compensation.  The first idea was that CEOs needed to act more like the entrepreneurs who started the large companies.  Some of the problem was attributed to the fact that professional managers were not being rewarded for innovation which, of necessity, involved risk taking.  Their salary, which was the majority of their total compensation was about the same regardless of whether the company did very well or not so well. A major mistake might cost them their job, but a major success would not necessarily provide a major reward.  So they had become caretakers, more than entrepreneurs and innovators.  The Japanese, on the other hand had found ways to improve quality and efficiency that we were not matching.  The second idea was that our business schools were teaching people how to manage things using established “functions of management” that were fairly straight forward and routine.  But maybe, people began to ask, there was more to being head of a successful organization than that.  Maybe there was something called “leadership’ that involved traits other than those that had been identified as the principles of management in the literature.  Lee Iacocca, the man who saved Chrysler in the 80s became the poster child for this line of thought.

In part 2 of this post we will examine how these two ideas have gotten us to place we are today.

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About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
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