Why the Best Executives are So Highly Paid
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Loading ...In this article Harrison discusses the reasons why the best executives are so highly paid. According to him the main reason for this is that exceptional executives are rare. A top executive has to make numerous decisions and calculations whilst taking every factor into account each day. There are very few people who have the capacity to organize people, increase productivity and profitability, all while facing criticism and driving a company forward. The survival and prosperity of a company depends on having people who can give good orders – and have them carried out by others. Those who can lead groups typically are the highest paid people inside corporations and groups. The highest paid executives are able to implement and get things done; the lowest paid typically are not able to do this.
The higher I have risen in my career, the more criticism and the more obstacles I have faced. In today’s world, if you lay off an employee, fire someone, or make any other potential decision that upsets people you will face incredible scrutiny. Former employees will go on blogs and criticize you and your leadership style. You will be attacked by many people. This is something that has happened to every leader and every organizer throughout the ages. The leaders of companies, organizations and religions are subject to incredible criticism and attacks by virtue of the position they are in. In some countries, the leaders are assassinated. Anyone who organizes groups of men and women, whether it is a country, a religion, or a company, will face criticism and pressures that the average working man and woman simply do not face.
When you go to the worst neighborhoods in any city in America you will find areas where there is rampant unemployment–people are living on the street, and where drugs, prostitution and murder rates are all high. The people you will find in these areas are those who are unable to follow orders and to successfully work for others, for the most part. They are people without jobs.
When you drive out of the ghetto you will find average, middle class and working class neighborhoods, where you will pass countless rows of houses, in which the televisions flicker each night. Inside each of these homes is a man who goes to an average job each day, follows orders and gets paid. He lives much better than the man in the ghetto, and his ability to follow orders and work in an organized system is rewarded. He gets a roof over his head and a job that brings him a steady paycheck.
The better the area, the more likely you will find men who are incredibly skilled in following orders, and in addition to following orders, they are usually in positions where they are giving orders–and are highly skilled in doing this. The better middle class neighborhoods will contain doctors, lawyers and other high level professionals, who have gone to school and learned to follow orders and procedures properly. These neighborhoods may also contain highly skilled laborers. The best neighborhoods will contain the upper level managers. Again we are talking about highly skilled people.
Then, in every city–as there has always been, you will find homes that are gigantic and have gates and other amenities that boggle the mind. These are the homes that are lived in by the wealthiest men. Some of these homes are so fantastic that the average man cannot even imagine setting foot inside them, much less living inside. These are typically not the homes of the men who follow orders, or are skilled in following orders. Instead, these are the men who are mostly skilled at giving orders, creating procedures and getting incredible amounts of work done through hundreds, if not thousands, of people. The most successful men, or women become this way because of the amount of work they can accomplish, and often the number of people they can get to do all the work that needs to be done.
The man who shovels a ditch each day is only affecting the dirt in front of him. He is paid accordingly. The man who supervises a group of ditch diggers is paid more because he is able to ensure that more work gets done by a group. The man who manages the group that supervises the group of ditch diggers is paid even more. And so on. The more skilled the executive, the more he is able to control, and the more work he is able to get accomplished. This requires an understanding of people, the environment, and the economy, and it involves making numerous decisions and calculations whilst taking every factor into account each day.
One of the most fascinating questions that I have heard before is why do certain executives in major corporations earn so much money. When you see a large company like General Electric, Home Depot, Disney, Apple and so forth, you will generally find Chief Executive Officers who are earning millions and sometimes tens of millions of dollars per year. It may seem hard for you to believe that someone’s efforts are actually worth $50,000,000 a year; however, there is a reason these people are paid so much, which is very easy to see. Nevertheless, throughout my entire life I have heard numerous people complain about the high salaries that top level executives receive. These complaints keep up year after year, but the salaries of the top executives in big corporations never end up decreasing. Instead, they end up increasing every year. For example, a recent article in the Atlanta Business News relates:
Even as the U.S. economy suffered its worst downturn in decades last year, many of Georgia’s leading public companies pushed pay for their top executives higher.
Retired Coca-Cola chairman Neville Isdell had a total compensation package that topped $23 million.Delta Air Lines CEO Richard Anderson ranked third in the AJC survey at $17.4 million.Current Coca-Cola chairman Muhtar Kent has a total compensation package of more than $19 million.Median pay for senior Georgia executives rose 3 percent in 2009 to $1.88 million, according to the Atlanta Journal-Constitution analysis of pay packages for more than 100 executives of Georgia’s 20 largest publicly owned companies.…[These increases came during] a year when 13 of the 20 companies saw their net income fall, and 17 saw the price of their stock drop. http://www.ajc.com/business/top-63374.html
WASHINGTON (CNN) — One day after President Obama ripped Wall Street executives for their “shameful” decision to hand out $18 billion in bonuses in 2008, Congress may finally have had enough.
“You can’t use taxpayer money to pay out $18 billion in bonuses,” an angry Sen. Claire McCaskill says.
Under the terms of a bill introduced by Sen. Claire McCaskill, D-Missouri, no employee would be allowed to make more than the president of the United States.
Obama’s current annual salary is $400,000.
“We have a bunch of idiots on Wall Street that are kicking sand in the face of the American taxpayer,” an enraged McCaskill said on the floor of the Senate. “They don’t get it. These people are idiots. You can’t use taxpayer money to pay out $18 billion in bonuses.” http://www.cnn.com/2009/POLITICS/01/30/executive.pay/
Why do the salaries of the top executives in various corporations keep rising despite the anger of politicians, bad economic conditions and so forth? The reason this keeps occurring is mainly because exceptional executives are rare. The truly exceptional executive, or corporate leader, is someone that very few companies can locate. The exceptional executive has the ability to lead a company and its people, and can organize all the necessary resources to get things done. There are no schools that can effectively teach someone to be an exceptional leader, or how to organize resources and marshal them in an effective way. The skill of a great executive leader is something that is more innate than taught. The skill of a great leader and executive involves controlling things and people around them (like the ditch digger)–but often also controlling people, places and things that may be thousands of miles away from them. Very few people have the ability to exert control beyond their immediate location.
The average worker and manager do not have the ability to do anything but control what is around them. A man can be a good salesman, for example, but inspiring an entire sales department and getting tons of salesmen to work productively for him is an entirely different matter. It is for this reason that good salesmen rarely become good sales managers. It is even rarer that someone can control and inspire and make productive not just a sales department, but also an accounting department. It is even rarer that someone can do this for an entire company and all its many divisions. Rarer still is the person who can do this for an entire company, and then make his company a leader in its field.
Everyone in any company is generally under the supervision of an executive of some sort. The people’s job security, and the growth and survival of the company is dependent upon the decisions that the top level administrator is making. When companies fail it is generally due to the skills of the executive (or lack thereof) and how the executive has organized (or has failed to organize) the resources of the company. If, under the direction of some executive, a company starts to perform poorly, there are many possible factors that might point towards the executive’s performance as a possible cause for the decline in productivity. For instance:
- The executive may have people doing jobs that are unnecessary, and which do not in any way lead to the profitability of the company.
- He or she may have too many people on staff to do various jobs.
- He or she may be pursuing unprofitable lines of business and therefore wasting resources.
- He or she may be making decisions about certain markets or business dealings that do not make any sense.
- He or she may be engaging in graft, corruption, or other illegal activities that hurt the company in the long run.
- He or she may be overpaying certain employees and underpaying others who deserve a higher salary.
- He or she may not be organized enough to properly produce and deliver the company’s product or service.
- He or she may not be hiring the right people.
- He or she may not be inspiring employees to do good work.
- He or she may be hiring the wrong people.
- He or she may be paying too much for supplies and goods that the company buys.
There are thousands of small decisions, relating to those above, which a good executive and corporate leader needs to consider on a daily basis. These are the sorts of decisions the highest paid executives make, and they are the sorts of decisions that can assist corporations in reaching their objectives. The better these sorts of decisions are made the better the company or organization will do. These decisions are so important to an organization’s survival, and so few people are proficient in making them–it is no wonder why there are so few excellent executives. This also explains why many executives are hated and unpopular for their decisions; each decision typically affects many people some way. and unfortunately not every decision can affect everybody in a positive or welcomed manner. When you are trying to be a good executive, or leader, it is absolutely impossible to please everyone. The executive who tries to please everyone will always fail and take the company or organization right along with him.
A big debate in the United States has been and probably always will be healthcare. I remember during the Clinton Presidency when Hillary Clinton tried to get universal healthcare pushed through. She failed and in a public statement I remember her saying something to the effect of “You cannot get anything done in Washington. These people are impossible to work with!”
While what she said may have had some truth to it, her job as a politician/executive/administrator was to do her very best to get others organized to accomplish her objective. The responsibility of an executive is to get things done, not to make excuses. The highest paid executives are able to implement and get things done; the lowest paid typically are not able to do this.
The survival of any company, or group, depends on having skilled administrators who can get things done and keep the group going. A man like Saddam Hussein, for example, ultimately failed as an executive because he was unable to keep things going, and he ended up having his country invaded and taken over. A more skilled administrator would have done whatever was needed to keep the country operating and to keep himself in power. The Korean Dictator Kim Jong Il, despite being ridiculed internationally, has been able to keep his country going and to keep himself in power. This is a monumental achievement, which means that Kim Jong Il is more powerful and skilled than it might otherwise appear.
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Great Post. The higher we go- careful we must be especially with our words and actions. Especially if we are in a leader stage its very difficult to handle people. Those you handle people become great leaders.
I don’t believe you are correct on this one. According to military pay charts, a 4-star general officer in the military with over 38 years in service earns $18,061.20 per month. However, this salary is limited by Level II of the Executive Schedule which is $14,750.10 per month ($177,001.20 per year).
A basic private with less than 2 years in service earns $1,399.50 per month ($16,794 per year). Therefore, the difference between the lowest paid and the highest paid is a factor of about 10 times.
A 4-star general officer performs all of the functions (and more) that you list above — for $178K/year. Sure you add a few perks such as housing, etc. He or she will probably make at most $200K per year.
The pay difference in industry however is 1000-fold. For example, consider Wal Mart:
At the top end of the wage scale is Chief Executive Lee Scott, whose estimated $17.54 million compensation package last year included his salary, health and pension benefits, bonuses, profit sharing and stock options, as well as other perks, according to the Interfaith Center on Corporate Responsibility.
At the lowest rung is the average pay of the Wal-Mart associate, who makes just north of $17,617 a year, according to the ICCR’s math. The organization used an hourly wage of $9.68 — reported by Wal-Mart — and multiplied that by 35 hours a week and then again by 52 weeks in the year.
That’s a difference of 1000:1. I do not believe that Mr. Scott has greater responsibilities or challenges than Admiral Mike Mullen (the current Chairman of the Joint Chiefs of Staff) or General David Petraeus (who stabilized Iraq and is the current CENTCOM commander). Yet Mr. Scott earns 100:1 over Admiral Mullen and General Petraeus; and over 1000:1 over his workers.
Bottom line: I do believe in good pay for good people. However, if costs are of major significance to an organization, executive pay differentials are the first place I would start.
In fact, with respect to President Obama:
The President earns $400,000 per year, along with a $50,000 monthly expense account, a $100,000 non-taxable travel account and $19,000 for entertainment.[13] The most recent raise in salary was approved by Congress and President Bill Clinton in 1999 and went into effect in 2001. (http://en.wikipedia.org/wiki/President_of_the_United_States)
As a final note to your article, with respect to what is really needed in a great executive, I refer to the Military Maxims of Napoleaon:
Maxim LXXIII. The first qualification in a general-in-chief is a cool head — that is, a head which receives just impressions, and estimates things and objects at their real value. He must not allow himself to be elated by good news, or depressed by bad.
The impressions he receives either successively or simultaneously in the course of the day should be so classed as to take up only the exact place in his mind which they deserve to occupy; since it is upon a just comparison and consideration of the weight due to different impressions that the power of reasoning and of right judgment depends.
Some men are so physically and morally constituted as to see everything through a highly colored medium. They raise up a picture in the mind on every slight occasion, and give to every trivial occurrence a dramatic interest. But whatever knowledge, or talent, or courage, or other good qualities such men may possess, Nature has not formed them for the command of armies, or the direction of great military operations.
Interestingly, just after I posted this reply to your column today, I received the following story re executive pay from Findlaw:
Your Money In Their Pockets: N.Y. A.G. Cuomo’s Exec Bonus Report
By Joel Zand on July 30, 2009 2:16 PM | No TrackBacks
Imagine you have a corporation that’s hemorrhaging money. Shareholder’s money, clients money, and money to pay employees and suppliers. What would you do if someone came along with some emergency moolah to save your business?
You’d be tempted to take it.
But if your business lost billions, you laid off thousands of employees, and you received roughly as much money in bailouts from the government, would you still pay employees hefty bonuses? Would you pay ‘em billions and billions in bonuses?
You would? Then you must be working at Wall Street firms like Citigroup and Merrill Lynch.
New York Attorney General Andrew Cuomo’s report on Wall Street bonuses reveals that:
“Together [Citigroup and Merrill Lynch] lost $54 billion, paid out nearly $9 billion in bonuses and then received TARP bailouts totalling $54 billion.”
Three other Wall Street firms — Goldman Sachs, Morgan Stanley, and J.P. Morgan Chase — paid out bonuses for 2008 that “were substantially greater than the banks’ net income,” according to Cuomo.
Taxpayer dollars hard at work, or hardly working? You be the judge.
Here is N.Y. Attorney General Cuomo’s report on executive bonus payouts by Wall Street firms and banks that fired thousands and obtained billions in TARP bailouts from the federal government.
http://blogs.findlaw.com/courtside/2009/07/your-money-in-their-pockets-ny-ag-cuomos-exec-bonus-report.html
Harrison Barnes:
Your article on why execs are so highly paid was good. However, you didn’t answer a couple of questions that even lowly ditch diggers are wondering.
1) What is the real difference between the salary of 250 million dollars and 750 million dollars? Can you really find something to spend that much money on?
Instead of taking 200 million dollars in pay and bonuses you (because of good business practices) have to make the “hard decision” to lay off people who are making 20,000 to 30,000 dollars a year.
Please explain your “higher thinking” around this.
2) Why are top executives who completely ruin a company get paid millions of dollars to just go away?
Actually – the more I think about it, the more angry your article makes me. It shows the absolute lack of respect and credence you give to all of the people below you who actually make it possible for you to make the career moves and the money you make — only to be thrown away by you (as a highly paid executive who is very rare) because of your business acumen.
Greed is greed. There is no excuse for it. And part of greed is making innocent people pay for the guilty person’s actions.
Statistics have shown consistently that those with the lowest salaries give the most (percentage wise) to charities, also.
Agree with Mary Manning. The problem with executive compensation is that the shareholders (and taxpayers) don’t get their money’s worth. If a company is going to pay someone millions of dollars, that individual better be producing million dollar results. As can be seen from the story that appeared in the New York Times this isn’t so.
Finally, given today’s economic picture, what company can justify paying its executives in the millions? If a person owns the company, so be it; he or she can pay themselves whatever they want. If shareholders and/or taxpayers own the company — NO WAY!
In fact, the average hedge fund manager in Wall Street makes about $20 million a year. Are they worth it today? They make no more significant decisions than the Chief Investment Officer of CALPERS — the highest salaried position in California government — who is paid $500K a year.
As Mary says, instead of laying people off, companies would be better served by cutting executive pay.
***
Bankers Reaped Lavish Bonuses During Bailouts
STORY and ERIC DASH
Published: July 30, 2009
Thousands of top traders and bankers on Wall Street were awarded huge bonuses and pay packages last year, even as their employers were battered by the financial crisis.
Skip to next paragraph
Nine of the financial firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008, according to a report released Thursday by Andrew M. Cuomo, the New York attorney general.
At Goldman Sachs, for example, bonuses of more than $1 million went to 953 traders and bankers, and Morgan Stanley awarded seven-figure bonuses to 428 employees. Even at weaker banks like Citigroup and Bank of America, million-dollar awards were distributed to hundreds of workers.
The report is certain to intensify the growing debate over how, and how much, Wall Street bankers should be paid.
In January, President Obama called financial institutions “shameful” for giving themselves nearly $20 billion in bonuses as the economy was faltering and the government was spending billions to bail out financial institutions.
On Friday, the House of Representatives may vote on a bill that would order bank regulators to restrict “inappropriate or imprudently risky” pay packages at larger banks.
Mr. Cuomo, who for months has criticized the companies over pay, said the bonuses were particularly galling because the banks survived the crisis with the government’s support.
“If the bank lost money, where do you get the money to pay the bonus?” he said.
All the banks named in the report declined to comment.
Mr. Cuomo’s stance — that compensation for every employee in a financial firm should rise and fall in line with the company’s overall results — is not shared on Wall Street, which tends to reward employees based more on their individual performance. Otherwise, the thinking goes, top workers could easily leave for another firm that would reward them more directly for their personal contribution.
Many banks partly base their bonuses on overall results, but Mr. Cuomo has said they should do so to a greater degree.
At Morgan Stanley, for example, compensation last year was more than seven times as large as the bank’s profit. In 2004 and 2005, when the stock markets were doing well, Morgan Stanley spent only two times its profits on compensation.
Robert A. Profusek, a lawyer with the law firm Jones Day, which works with many of the large banks, said bank executives and boards spent considerable time deciding bonuses based on the value of workers to their companies.
“There’s this assumption that everyone was like drunken sailors passing out money without regard to the consequences or without giving it any thought,” Mr. Profusek said. “That wasn’t the case.”
Mr. Cuomo’s office did not study the correlation between all of the individual bonuses and the performance of the people who received them.
Congressional leaders have introduced several other bills aimed at reining in the bank bonus culture. Federal regulators and a new government pay czar, Kenneth Feinberg, are also scrutinizing bank bonuses, which have fueled populist outrage. Incentives that led to large bonuses on Wall Street are often cited as a cause of the financial crisis.
Though it has been known for months that billions of dollars were spent on bonuses last year, it was unclear whether that money was spread widely or concentrated among a few workers.
The report suggests that those roughly 5,000 people — a small subset of the industry — accounted for more than $5 billion in bonuses. At Goldman, just 200 people collectively were paid nearly $1 billion in total, and at Morgan Stanley, $577 million was shared by 101 people.
All told, the bonus pools at the nine banks that received bailout money was $32.6 billion, while those banks lost $81 billion.
Some compensation experts questioned whether the bonuses should have been paid at all while the banks were receiving government aid.
“There are some real ethical questions given the bailouts and the precariousness of so many of these financial institutions,” said Jesse M. Brill, an outspoken pay critic who is the chairman of CompensationStandards.com, a research firm in California. “It’s troublesome that the old ways are so ingrained that it is very hard for them to shed them.”
The report does not include certain other highly paid employees, like brokers who are paid on commission. The report also does not include some bank subsidiaries, like the Phibro commodities trading unit at Citigroup, where one trader stands to collect $100 million for his work last year.
Now that most banks are making money again, hefty bonuses will probably be even more common this year. And many banks have increased salaries among highly paid workers so that they will not depend as heavily on bonuses.
Banks typically do not disclose compensation figures beyond their total compensation expenses and the amounts paid to top five highly paid executives, but they turned over information on their bonus pools to a House committee and to Mr. Cuomo after the bailout last year.
The last few years provide a “virtual laboratory” to test whether bankers’ pay moved in line with bank performance, Mr. Cuomo said. If it did, he said, the pay levels would have dropped off in 2007 and 2008 as bank profits fell.
So far this year, Morgan Stanley has set aside about $7 billion for compensation — which includes salaries, bonuses and expenses like health care — even though it has reported quarterly losses.
At some banks last year, revenue fell to levels not seen in more than five years, but pay did not. At Citigroup, revenue was the lowest since 2002. But the amount the bank spent on compensation was higher than in any other year between 2003 and 2006.
At Bank of America, revenue last year was at the same level as in 2006, and the bank kept the amount it paid to employees in line with 2006. Profit at the bank last year, however, was one-fifth of the level in 2006.
Still, regulators may have limited resources for keeping pay in check. Only banks that still have bailout money are subject to oversight by Mr. Feinberg, the pay czar. He will approve pay for the top 100 compensated employees at banks like Citigroup and Bank of America as well as automakers like General Motors.
Another thought on this subject:
I believe that in public companies, senior executive compensation ought to be in terms similar to lawyer’s contingency fee agreements, if the company does well, you get your compensation for that year. If the company loses money, you get nothing. Produce or perish.
And if a person is so smart and competent that they need millions of dollars in compensation to remain with a company, let them prove it on the terms above.
As a shareholder in various corporations, I do not believe any senior executive’s compensation is worth more than the results produced. If you want millions of dollars in compensation, you had better produce millions of dollars in results. If you produce losses, then in turn, you will be compensated with what you produced — NOTHING.
Finally, my preference is to prefer to keep workers employed than to give a few senior executives millions of dollars in compensation for producing very little return. The fact is that this country needs people to be working, jobs, etc. We do not need to give more money to just a few people who are already being paid 1000 times more than their workers.
I agree with Gonzalo Vergara (at least there are two of us). It’s very hopeful to find a person with obvious business acumen along with the appropriate “big picture” mentality needed to understand what others contribute to someone else’s “bottom line.”
Thanks so much for explaining the issues so well. I wonder if Mr. Harrison has read these comments.
He’s strangely silent….does he just write the initial “correct” viewpoint and then move on? (This is my first exposure to this forum, so I’m really wondering — not being sarcastic).
I apologize — you can tell I’m new — should have said Mr. Barnes.