In previous posts, we observed that some of the spread between the income of the top 1% of the population and the rest of us in the last 20 years has been the large increase in what some college coaches and corporate CEO’s are paid. The last 2 posts have looked at why this has likely happened. In this one we will consider if this should be considered a problem and what might happen to change it. It would seem to be that there are two things to consider in deciding if this is a serious problem: 1) Is it fair that they should get paid so much and 2) what harm does it do? – does it hurt the rest of us?
A few years ago, I was trying to hire a 2nd level manager to fill a vacancy that had arisen because of a retirement. The VP of Human Resources who was responsible for maintaining job grades and consistent salary levels asked me, “Can’t you find someone who will do this job for less money?”. My immediate reaction was, “Yes, I probably could, but then, I’d do the CEO’s job for less money than your paying him.” Of course I then added, “but I doubt you would consider me qualified for that job.” The fact is that for any management job – from at least the 2nd level on up there is, no doubt, someone who would fill the job for less money than what the organization is probably paying. As was observed previously, by the last half of the last century, most large corporations had adopted job ladders and position descriptions for all positions in the company. The position descriptions define the knowledge and experience required for each position in the hierarchy along with the pay range of each position with one of the primary aims being to keep pay levels consistent throughout all parts of the organisation. For all jobs below the senior executive level, it is not difficult to tell if someone is qualified. And one of the assumptions is that the higher in the organization the position, the more the responsibility the more influence on results, so higher the salary. Being paid more the higher the position in the corporation is generally accepted as reasonable and fair. But fairness – like beauty – is in the eye of the beholder. How much more is too much?
I believe there are probably three factors driving Boards to pay amounts that would seem to be extravagant (as defined to be more than the job ladder guidelines would consider reasonable). 1) The job is considered to be critical factor in the success or failure of the company. 2) The population of candidates is considered to be relatively small. and 3) We don’t know with any certainty how to recognize legitimate candidates until they have actually done the job. If these perceptions are correct, then perhaps the pay rate in not unfair. I believe there is more to being a CEO than learning the functions of management that I learned in grad school. But a business organization is still a team game and I don’t believe that the CEO alone is the only critical factor in achieving high company performance. A book on corporate change, written as a result of a study by McKinsey & Company a few years ago called Real Change Leaders concluded “surprisingly” that “the make or break factor is not top management but a new breed in the middle: Real Change Leaders. They’re middle managers and business professionals…”. It’s also possible that the reason we think that the pool of candidates is small is because we don’t know how to recognize the skills and abilities that are important. I believe that there is a difference between traditional management skills and leadership. Leadership has been more difficult to define, but that doesn’t mean that it’s not possible. Jim Collins book, Good to Great, defines some important characteristics of effective CEO’s. Interestingly enough, they are not too different from the ones attributed to Real Change Leaders in that book. It may be that if we learn to recognize and appreciate real change leaders, we would know who has the potential to be good CEO’s. But this is relatively new theory that was not taught when most current corporate leaders were in school, so it may take another generation for it to be conventional wisdom in the boardroom culture.
So in the meantime, the high pay may not be fair, but does it do any real damage to the rest of us?
Football is a zero sum game. For every winner there is a loser. If one football coach’s team wins more games, someone is going to lose more games. Fortunately, life and our economy are not zero sum games. When I was working for a large company, if my CEO got paid more, I didn’t get paid less. In fact, if a CEO’s company is doing what it needs to do to survive and prosper, the rest of us might be better off even if his pay is higher than it needs to be. In our competitive economy, if a company is going to grow and prosper, it needs to produce goods and services that are high quality at a reasonable price. In fact, in most cases continuous improvement in quality and price are necessary for survival. The fact that the Japanese were doing that better than we were was what started this trend in the 70’s. If the company can’t continue to do this under a CEO’s tenure, he won’t keep his/her job for long. And if we can buy better goods and services for less money, we are all better off. So if I am not making less because the CEO is making more, and if I can buy higher quality “stuff” for less money, where’s the harm? For college coaches, it may be not quite so simple if you believe that the colleges’ primary responsibility is to provide education, and the University is having to support an athletic department that can’t balance its own budget. And the cost of game day tickets has gone up as well. But that’s a whole different discussion for another day.