Top pe ople’s pay outstrips that of the rest

 The average paycheque of a US company bossin 1980 was 42 times that of the ordinaryfactory worker. By last year, the multiple hadgrown to 141.

Salary and bonuses for US chief executivesrose by an average 18 per cent last year. Whengains from long-term compensation, such asstock options, are included, chief executives’average total pay climbed by 30 per cent. Incontrast, white-collar professionals averaged a4.2 per cent gain and factory employees aver-aged a 1 per cent rise. Last year’s US inflationrate was 2.8 per cent.

In the past five years, the average pay of chief executives has gone up 92 per cent whilecorporate profits have risen 75 per cent. Butfew of these gains have trickled down to thehourly wage earners, supervisors or evenmiddle managers, and a whole swath of work-ers has been removed from payrolls altogether.Factory-worker pay is up only 16 per centsince 1990, while annual layoffs by large com-panies are up 39 per cent. There were almost440,000 in the US last year alone.

Many workers have benefited to someextent from the rising stock market, throughtheir investments in mutual funds and pen-sions and savings plans for retirement. Andmore companies are handing stock optionsand incentive bonuses to workers furtherdown in the organization. But all this is on amuch smaller scale than the largesse handedout to those at the top.

End of the shared sacrifice era

Shared sacrifice was once thought to be a keyaspect of leadership. General George Pattondid not ride in the lead tank only for the photoopportunities, but because he thought animportant part of leadership was to be in thefield. But many of the new generation of cost-cutting executives seem to have no sense of shared sacrifice. The chief executives of the 20US companies with the largest announcedlayoffs last year saw their salaries and bonusesrise by 25 per cent – well above the average.When the value of new stock-option packagesgranted to these chief executives is taken intoaccount, the increases are often staggering.

Robert E. Allen, AT&T chairman, was theonly chief executive of the 20 to take a cut insalary and bonus. But he got such a largeoption grant that the total value of his paypackage rose by 143 per cent, to $15.9 million.

Caterpillar Inc. chairman Donald V. F itesgot a 75 per cent pay rise last year, after lead-ing the company to record profits. But the

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Volume 10 · Number 4/5 · 1997 · pp. 164–165

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PerspectiveHow ordinary w orkersfeel w hen fat cat get st he cream

Abstract

“ Snouts in the t rough” is a common t abloid new spaper

reaction to new s that yet another company boss has

gained an enormous pay increase at a tim e when th e firm

has laid off large numb ers of employees, imposed ever-

greater workload s on those who remain and given them

litt le or not hing by w ay of a wage increase. No w onder

ordinary employees increasingly feel disfranchised,

discouraged and angry. Discusses the following issues:

How much comm itm ent can a company realistically expect

from rank-and-fi le workers who believe themselves to

have been so cheated? Why has t his situation arisen? And

w hat can be done to r ight the w rongs?

 

bonus pool for the company’s hourly-paid,management and salaried employees fell by 25per cent, because 1995 targets were set athigher levels. T he company’s 8,700 unionizedemployees, who had returned to work inDecember after a 17-month strike, did notqualify for payouts.

Loss of t rust

One concern is that the impressive productivi-ty gains made by US companies over the lastfive years could evaporate as workers becomeless trusting of their employers and less com-mitted to their jobs. Workers who are worriedabout their jobs are less likely to take part inthe creative problem solving that contempo-rary business requires.

Another concern is that if highly paid chief executives are condemned for cutting theirworkforces, they will become less likely to takethe unpopular decisions necessary for thecompany to survive.

It is virtually impossible to isolate theimpact of high pay for chief executives on themorale and productivity of employees. Howev-er, some researchers have discovered that highpay inequality in companies leads to a lesscooperative workforce, higher staff turnoverand lower product quality. I t appears thatthese companies are unable to sustain a work-place of people with shared goals.

What lies behind t he big rises?

Rises in executive pay during the 1980sbrought demands from investors for greateraccountability and returns for the money. Thisforced boards of directors to forge closer linksbetween executive pay and company perfor-mance, largely by moving more pay into stockoptions. But it also changed the way executivessaw their own role and that of their company.

Historically, many chief executives believedthat their companies were responsible to agroup of stakeholders, including employees,customers, the community and shareholders.In the 1990s, the interests of investors havecome to outweigh those of all other stakehold-ers, particularly the employees. Today’s chief executive would probably be

embarrassed to admit that he or she had sacri-ficed profit to protect employees or a commu-nity. T he No. 1 performance measurement isshareholder wealth creation, and top execu-tives have been among the beneficiaries.Record gains on the US stock market last yearhave given a big boost to chief executives’ pay,and even greater rises are on the horizon. WaltDisney’s M ichael Eisner made a $317.9

million paper gain on his stock options, whilePepsiCo chairman Wayne Calloway couldcash in options worth almost $120 million.

What boar ds of directo rs can do

Boards of directors need to be more vigilant inchallenging stock-option packages for chief executives. M ore firms should follow the leadof Eastman K odak and others in requiring topexecutives to buy stock in their companies, sothey are treated in a similar way to sharehold-ers.

More chief executives need to be aware thatmaking personal sacrifices – perhaps by takinga voluntary pay cut – would considerablyreduce the mistrust and bitterness which oftenarise when workers are made redundant.

For the past four years, Avon Products’chief executive James E. Preston has notreceived a pay rise – by his own request. Theboard froze his $610,000-a-year salary for fiveyears and cut his bonus payments. In return,he got a one-off stock-option grant of 50,000shares.

He cut costs and debts and revampedsenior management. H e abandoned unprof-itable businesses, introduced new productsand led the company into new markets. Andhe extended incentive pay to everyone in thecompany. Now all employees have a vestedinterest in ensuring the company’s success.

Long-term ef fects

 The pay of US chief executives is, more thanever, tied to performance. The system hasdoled out rich rewards – but also hefty penal-ties on those who do not perform. More thanever, the boss is likely to lose his or her job andperks for failing to deliver the profits whichshareholders expect. Without the measuresthat the marketplace has prodded chief execu-tives to take, the circumstances of lower-levelemployees who have kept their jobs may wellhave been less assured. But the jury is still outon the long-term consequences for US compa-nies and their workers.

Few would argue with the conclusions of this article that boards need to be more vigi-lant in challenging pay packages and that chief executives should be more sensitive to thehardships they impose. T he whole future of programs for greater co-operation in the work-place may depend upon it.

 This is a précis of an article entitled “How high canCEO pay go?”, which was originally published inBusiness Week , 22 April 1996, pp. 48-54. Theauthors were John A. Byrne and Lori Bongiorno.

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How ordinary workers feel w hen fat cat gets the cream

Author/s  

M anagement Development Review

Volume 10 · Number 4/5 · 1997 · 164–165