Freezing executive pay opens up money for workers

An article in The Guardian earlier this week caught my eye. CareCentrix CEO John Driscoll penned an editorial “We froze the salaries of 20 executives – and it improved the lives of 500 employees.” Driscoll took the reins of this struggling healthcare company, whose financial troubles included a significant amount of staff turnover.

Driscoll worked with his leadership team and Human Resources to make a number of changes, but he felt that was insufficient to right the ship. So, he made a decision to find more money to keep workers who were struggling and working multiple jobs.

As Driscoll wrote in The Guardian, “What that meant for our company was that if we just froze the wages of our most senior team – less than 20 executives – we could radically increase the wages and improve the lives of nearly 500 of our teammates.

The conversation with our executives was straightforward. We were in the midst of a turnaround. We were demanding much from every corner of the company. Small financial sacrifices from those at the top could be life changing for those at the bottom of our wage scale. We needed to do it to build a real sense of Team CareCentrix. They agreed. With joy, we announced in January 2015 that our minimum base pay for employees would go up to $34,000, or the equivalent of $15 per hour.

Raising wages in the midst of a business turnaround was not easy. We needed our executive team to buy into a vision of business success where every employee had a fair shot at success. It worked.

Our business has tripled over the past five years. Our minimum wage is now approaching $16.50 per hour and last year we broadened profit sharing to all levels of the company.”

This caught my attention as the US far exceeds other nations in the ratio of CEO pay to average worker pay and has for some time. Having been a former Compensation & Benefits manager, manager of people and consultant, executive pay is much more upwardly elastic than that of average workers. Average worker pay has a lid placed on it through the budget process – which often overemphasizes past, current or expected troubles. Also, downsizing at the time of annual raises facilitates the lowering trend on average pay increases as folks who would have received little or no increase are let go – so folks that remain receive suppressed increases to make the percent increase in the budget work.

What I like about this CareCentrix example is the thought process and solicited buy-in from rhe executives. Yet, it need not take a burning platform to make needed change. There is a productivity cost to turnover that impacts the bottom line due to constant churning, replacement, recruitment and training of staff. Keeping more people longer is accretive to profits.

Some larger national companies have recognized this and raised their floor pay levels – Bank of America, Wells Fargo, and Walmart are in this group. So, thoughtful discussions are needed, in my view, around these issues irrespective of or along with governmental imposition on increased minimum wages.

US CEO Pay has reached epic differential

As reported in The Guardian today, US CEOs now make in pay 339 times the pay of the average worker according to a Bloomberg study of 225 companies. In retail companies, the ratio is 977 to 1 on average. Let that sink in a little.

A quote from the article entitled “‘CEOs don’t want this released’: US study lays bare extreme pay-ratio problem” by Edward Helmore is very revealing:

“According to a recent Bloomberg analysis of 22 major world economies, the average CEO-worker pay gap in the US far outpaces that of other industrialized nations. The average US CEO makes more than four times his or her counterpart in the other countries analyzed.”

Some people may push back and opine that US CEOs may be worth 4X that of their non-US industrialized nation counterparts. If that were true, it would mean US company performance is 4X that of non-US companies and there would be a huge flight of capital to the US.

In my years as a consultant, I have seen CEO pay ratchet up over time, rewarding CEOs with stock grants and options. What happens is a competitive totem pole exercise, where the competitive pay analyses are upward elastic and downward inelastic (they go up more easily than they go down) over time.

I have also observed the 80/20 rule applies to CEOs as well, with 20% of the CEOs earning their keep. I have worked with egalitarian CEOs, benevolent dictator CEOs and some of the greediest SOBs you will ever meet. Seeing CEOs who realize the teamwork involved in the company making money is admirable. On the converse, seeing CEOs who are imperialistic is off putting. As I write this, I am thinking of the handfuls I worked with and some who were notorious over the years for their greed.

On the bottom end of this exercise are efforts to flatten pay for the average worker. Over time companies will use a variety of rationales and tactics to put lids on pay increases. The salary increase budget may be limited because of the uncertainty in the economy, the company is having some hardship or the company expects to have hardship. Sometimes concurrent with the salary budget, groups of people are laid off. Why is the timing an issue? By moving on lower performers, people whose salary increases would have kept the average percentage increase down are removed from the equation meaning better performers will now get lesser increases.

Coupling this with pressure on not increasing the minimum wage and to diminish the power of labor unions (that is another story), these ratios result. I respect greatly the need for incentives to help reward successful CEOs, but we must not forget who helped them earn those numbers.

We have a poverty problem in this country. We have a middle class where too many are living paycheck to paycheck. Yet, our leaders passed a tax law that benefits CEOs, their companies and the wealthy by a large margin. It would have been nice to have at least obligated the pass through of salary increases or an increase in the minimum wage to a living wage. So, do not expect this ratio to measurably decrease any time soon.

When Greed Leads

In the infamous movie “Wall Street” with Michael Douglas playing the shoe-shined, spit-polished, and dressed to the nines villain, Gordon Gekko, he uttered the phrase “greed is good.” As he found out, for greed to be considered in the same ball park as good, it needs a lot of caveats. We all want more, so each of us has a greed gene inside of us, but unadulterated greed, is not good.

In the US, many of our problems can be traced to greed. We pay CEOs in the US twenty to thirty times higher than CEOs are paid in other countries, when we look at the ratio of CEO pay to pay of the average worker. While the UK and Canada and other places are more like 15 to 1, the US ratio is more like 350 to 1. Having worked with a lot of CEOs in my day, I do not believe US CEOs are worth that differential. To perpetuate this wealth and income levels, in our country we use reasonably legal, but somewhat unethical means to gain political favor. It is not a surprise with the high cost of running for office, that so many legislators retire from service with much more wealth than they started with. That wealth did not come from a legislator’s salary. In other words, our greed perpetuation is much more legitimized.

Yet, in other countries, greed has led to rampant corruption and bribery. The evicted President of the Ukraine, Viktor Yanukovych, is the most recent example of living high on the hog at the expense of a country in need. Apparently, he built himself an estate with the all the finishings, personal golf course, included. While Ukrainian people experienced severe economic difficulty, he was well above the fray. However, any leader willing to shoot  on his own citizens with sniper fire, speaks volumes about his character, but that deserves its own post. Russia is now giving him asylum as their leaders value corruption as a skill.

What I have witnessed in my years as a business person, is the more totalitarian the leadership, the more corruption exists. Hosni Mubarak, when he was ousted as the Egyptian leader was worth US$ 81 Billion. So, while Egyptians were getting by on US$ 2 per day, Mubarak was not so economically challenged. It is like a current day “Animal Farm” where George Orwell described the pigs living quite nicely inside the house, while the other animals toiled away for nothing.

But, greed is not restricted to country leadership, as there are numerous examples in industry whether it be for profit or non-profit. On the latter, we have witnessed many seemingly altruistic, even religious people get caught up in greed. My favorite quote is from Reverend Jim Bakker of the Praise The Lord club who solicited millions from unsuspecting donors and lived in a house with solid gold faucets. Bakker was quoted as saying “The Lord wanted me to have nice things.” Bakker went to jail for his false advertising to people and poor stewardship with their money. Unfortunately, he has company from other religious leaders with convictions of tax evasion, bilking funders, poor stewardship, etc.

Yet, the true greed gets back to the CEO suite of for profit companies. We are only beginning to touch the issue of better governance of CEO and CEO direct reports’ pay. The issue of relativity of CEO pay to the average worker is telling. I have worked with organizations that are very egalitarian and leaders make an appropriate level of income. However, I have also worked with, consulted with and known many CEOs who are simply greedy sons of bitches. As an example, one CEO was not only paid very well, he never paid for anything that he could get the company to pay for. The company paid for his daughter’s wedding because he invited clients. And, one of his classic lines when he was being apprised of a potential benefit program for employees was to hold up his hand to stop the talker and ask “what’s in it for me?”

So, it comes down to we the people have to be as vigilant as possible. We have to question leaders whether they are in industry, philanthropy, religious organization or government. We need to challenge them to be the best of stewards with our money and resources. And, we need a healthy dose of skepticism. We need to dig underneath why someone is recommending something. Do they have a vested interest in the decision? It never hurts to ask. As the answer may be one that needs to be heard by many.