Tuesday, January 18, 2011

Well said

Murray Dobbin discusses how top-end incentive structures affect our broader society:
The CEOs' virtual control of the public policy process which allows for this obscene level of inequality delivers another message: democracy, whose essence is equality, will not be allowed to mess with the "natural" order of things. Samuel Huntington, one of the U.S. elite's longest-running apologists, pined 35 years ago for the good old days: "Truman had been able to govern the country with the co-operation of a relatively small number of Wall Street lawyers and bankers." He pines no longer. How is it any different today as the financial sector, supported by the resource and manufacturing giants, effectively dictate economic policy to whatever government is in power.

There is nothing in this compensation pattern that benefits the corporation itself or the economy more broadly. In fact it is clear that just the opposite is the case: compensating CEOs for the share price (over which they have almost no control) rather than profitability, stability, employee loyalty, long-term growth, modernization and strong capitalization actually weakens the corporation and distorts proper management. And inequality, to which this disparity contributes, damages competiveness, innovation and productivity.
It is rare for any commentators in the business press to even raise the question as to whether or not any of the CEOs receiving multiple millions in compensation are actually worth it. The pay levels, including bonuses, imply that the CEOs are geniuses -- uniquely responsible for the success of their companies. But there is nothing in management theory or practice to support such a conclusion. One of the most famous management gurus, Peter Drucker, who conducted a ground-breaking study of General Motors, stated: "No institution can possibly survive if it needs geniuses or supermen to manage it. It must be organized in such a way as to be able to get along under leadership composed of average human beings. No institution has solved the problem of leadership... unless it gives the leader a sense of duty and a sense of mutual loyalty between him and his associates...."

That "sense of mutual loyalty" has long since been tossed in the dust bin of business history. Loyalty now has to be paid for in the millions.

No comments:

Post a Comment