Excessive Executive Pay Destroys Value

One of the scariest aspects of the response to the 2008 banking crisis has been the complete absence of intelligent debate on the whole issue of executive bonuses.

We have been deluded by suggestions that any questioning of the high levels of executive bonuses is an attack on Capitalism. Thus going along with it is to support left wing liberals and radical socialists who would destroy everything that it has achieved. Consequently it becomes a case of protecting the system, rather than looking at the issue as a matter of principle. So the dividing line and the prevailing discussion has become politicised and the debate one of ideological point-scoring.

Paradoxically, Capitalism demands the subject is properly and rationally discussed. You can thus imagine my relief when I came across this piece by Henry Mintzberg from the Wall Street Journal. It certainly is a breath of fresh air.

Whether you agree with what he says or not, the fact remains that business – however it is organised – is a collective effort. It is the ultimate team game. Consequently it makes no earthly sense for some to be paid (many) thousands of times what the lowest paid employee in their organisation gets. There is no moral justification for it, for no one person can make that much difference to the organisation. Remember, the space shuttle blew up because of a faulty “‘O’ Ring”. That design shortcoming had the potential to destroy NASA and, possibly, the whole American space programme. Yet what was the pay differential between that designer and the head of NASA? This is a scenario that plays out in organisations across the country and the world and certainly in the failed banks.

It is therefore completely fallacious to argue that reducing their incomes will drive bankers – and other business executives – elsewhere. This is a fear tactic used by deluded or hoodwinked politicians to justify their appeasement. It does nothing to protect the efficiency and competitiveness of their constituency businesses or the electorate that they are supposed to represent. In fact it threatens the longer term outlook.

Lean organisations need FAT people – fulfilled engaged workers – and not “fat cat” executives. Business success depends on it, and the growing earnings disparity actually sabotages any chance of engaging workers. It reduces competitiveness and to fail to do something about it will – sometime in the future – induce the same historical ridicule as Marie Antoinette’s immortal “Then let them eat cake!” True Capitalism demands the situation is remedied.  Mintzberg says the cure is to eliminate bonuses. I agree with totally. But I also answer his question – “then what?”