It’s been 10 years since the fall of Dick Grasso, Chairman and CEO of the New York Stock Exchange. Not so long ago, we had Enron and Tyco too. The topic of executive compensation continues to bubble up as humanity produces each new round of corporate autocracies and oligarchies, as they capitalize on ever shifting currents of economic opportunity. The Los Angeles Times published an editorial on the latest examples, brought on by the SEC’s Proposed Rules for Pay Ratio Disclosure which could potentially require publicly traded companies to disclose the ratio between the CEO’s compensation and median employee compensation.
I definitely get the morality issue. An executive class enjoying fabulous wealth on the backs of corporate workers. However, the government should remain powerless over the issue of executive compensation, because compensation is squarely in the domain of the board of directors and there is a huge body of federal and state law the defines authority of the board and shareholders.
But even if some people try to impose regulations, it’s simply not possible to change executive compensation directly. Why?
Executive compensation is a function of the organization which produces that wealth. The kinds of organizations which concentrate wealth and power at the top are corporate monarchies and oligarchies. Show me an executive earning massive amounts of compensation and I will show you the corporate equivalent of Russia before 1917, Great Britain before 1783.
Change the way the organization is governed and you will change the distribution of wealth.
Ever wanted to go back in time to experience the real medieval Europe? Don’t have to. Just go back to the office tomorrow and experience what people do when every level in the corporate hierarchy above is appointed by next person higher up. That’s what medieval Europe was like. Why was courtesy so prevalent then? Because your lord held a huge imbalance of power over you and any lack of courtesy resulted in punishment or death, depending on the amount of benevolence in your lord.
The power in your relationship with the boss is completely one-sided. In terms of your economic survival your boss has nearly all the power, you have nearly none and there is nothing you can do about it except leave when it gets really bad. Yes, you are protected by basic employment regulation. But your boss can still fire you if s/he wants to, even if he’s the jerk and you’re the dedicated soul turning-in a solid performance every day. Getting fired today (I mean truly fired, not laid-off) is essentially economic expulsion from the kingdom. Whew, at least we don’t have corporate executions in America (they do in other parts of our world). All corporations operate this way, and by human nature we are guaranteed to find a wily few who know how to wrangle their way to the top under those social conditions. Sometimes we get a benevolent dictator, sometimes we don’t. Sometimes we get a benevolent dictator who we like, except for the part about their acquiring massive amounts of pay for themselves. The worst think the way to do it is to win through fear and oppression. The best do it by ensuring the rank and file are generally content.
However, do not despair. Executive compensation is going to change. We are going to see it happen in our lifetime and we have a pretty good idea about how it’s going to happen. (History of Europe.) You can rest assured, no executive will willingly give-up power and wealth. It will be taken by force. I don’t mean force of arms or even regulation. I mean force of economic power. You see, when a company loses to a rival (like Nokia and Blackberry losing to Apple), the company’s monarchy loses wealth and power by economic force. The kingdom (market) is taken over by the rival army (company). If the loser’s decline goes all the way to bankruptcy then executives are literally forced out. The court-appointed trustee walks into your office, with security if necessary, takes your keys and sees you out. This is the economic equivalent of executing the king.
Through all of economic history, corporations have been governed as autocracies (privately held) and oligarchies (publicly traded). Privately held companies’ are typically governed by the owners who exert more autonomous authority (sometimes benevolent sometimes not), similar to the King of England prior to 1649 (end of King Charles I). Publicly traded companies are accountable to shareholders so they operate somewhat like the constitutional monarchy of England between 1649 and 1783 (peace treaty signed with the former colonies America). The SEC imposes its authority over publicly traded corporations in the same way the English Parliament imposed its will over the English Monarchy. The Monarchy was still very wealthy, but powers were restricted. And so it is with corporations
What I am describing is the emergence of a whole new kind of corporate rival – the corporate equivalent of modern republics. Think America from 1783 onward (peace treaty with the British Empire). Think France from 1789 onward (the French Revolution).
Let’s suppose in the department where you work, you choose your manager through team elections and you can also do a recall at any time if s/he turns out to be a tyrant or incompetent. What are the chances that you will have to work under prolonged misery? Very low. Let’s suppose further that every department in your company elects managers from within the company or even from external candidates. Finally, let’s suppose the executive team go through a process where they are recommended by various groups (like party primary elections), then a slate of 3 candidates for each executive position is approved by the board of directors (who represent shareholders) and then finally, the executive team are chosen through a general election by the entire employee population. If a company is governed this way, what do you think are the chances that the difference between the lowest paid employee and the highest is going to be some obscene number. Not likely. More likely, you’re going to have an executive team that the majority of employees approved, which means they are accountable to employees, not just the board of directors. The board will like this arrangement because companies that run this way (it will be shown) produce better financial results.
Ever wonder why the President of the United States earns only $400,000? Because even with all that power, he is accountable to Congress and the people. Think about that. The majority of autocrats from small banana republics to Saudi Arabia possess far more personal wealth than the President of the United States. But who’s organization is produces more economic value, and therefore possesses more economic power and wealth?
That’s the deal. Executive compensation will be addressed by the emergence of more agile corporate republics, corporate meritocracies. It’s as though we are living in the corporate equivalent of Europe in the 1700s. Those new corporate republics will win more customers more often and the old monarchies and oligarchies will begin to lose (as happened in Europe during the 1700s and 1800s). As corporate monarchies and oligarchies decline, so will the number of executives who get out-sized executive compensation.