Do They Need to be Exorbitant?

Time was when CEO salaries were far less than the 300 times entry-level workers they are now, and actually CEOs seemed OK with that.  But then several things happened.

Organizational theorists argued that they needed more skin in the game to be motivated.  If all the reward for their hard work went to the owners, how could they keep engaged?  They suggested that stock options and bonuses would allow them to benefit more directly from their management success.

Subsequently, CEOs became competitive with each other.  Fueled by the myth of the “corporate savior,” i.e. the idea that the success of a company depended primarily on its CEO, they demanded higher and higher levels of compensation and perks.  Corporate boards, buying into the myth, were all too willing to give what they demanded.

But the habit did not catch on in Japan.  According to Businessweek: “Companies listed on Japan’s stock exchanges paid their chief executives an average of $580,000 in salary and other compensation last fiscal year . . .  about 16 times more than the typical Japanese worker. Average CEO pay at the 3,000 largest U.S. companies is $3.5 million, including stock options and bonuses.  (See, “In Japan, Underpaid – and Loving It.”)

There are reasons for this, of course, mainly having to do with the fact that Japanese executives tend to stay put.  Loyal to their companies, they don’t jockey for new assignments and jobs.  But their experience does suggest that the thinking that spurred the huge increase in CEO salaries in the U.S. was flawed.  CEOs do not need the salaries they have become accustomed to receiving in order to be motivated or committed.  In fact, it could be argued that it has made them more independent and greedy.

Now, of course, it’s too late.  Not only has it become established custom, but also we have created a new class of corporate and financial managers who believe they actually own the system.  They feel entitled to skim off the profits at the top for their own benefit, and they have persuaded many of us that this is the way the system has to work.

But if we think about the Japanese CEOs or even remember our own corporate history, we might conceive of pushing back.  Limits can be set, taxes can be raised, and a new public awareness can mitigate this massive redistribution of wealth.

What we don’t know we know about access to ownership is that we are all owners – majority owners, by far – of our public corporations.  Though our pension funds, individual retirement accounts, college saving funds, etc., we hold the majority of shareholder votes.  But we seldom think to exercise that power or seek ways to exercise it.

What to Call It?

It now seems clear that we are in the midst of an exceptionally deep and prolonged economic downturn, but one of the difficulties in coming to grips with it is the problem of finding the right label.  The familiar term “recession” doesn’t do it justice.

A number of economists and journalists call it “The Great Recession,” bulking up a regular or normal recession to fit the bill.  In their impressive new book, Eight Centuries of Financial Folly, Carmen Reinhart and Kenneth Rogoff call it the “Second Great Contraction.”  And last week in The New York Times, Paul Krugman came out with the “Third Depression.”  He observed that unemployment “remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly.”  (See “The Third Depression.”)

In the midst of the credit crisis two years ago, government officials and bankers struggled to avoid a complete collapse of our financial system, one that they thought would surely bring on a “Depression.”  And when the system did not fail, they thought they had averted it.  Perhaps not.

Right now, of course, we can’t really know how long it will last.  Stocks occasionally rally, but that may not be the best indicator of how the downturn is affecting most of us.  At this stage, the recovery from unemployment seems very slow and discouraging. State and local governments are cutting services drastically.  Housing is still depressed.  Loans are hard to come by.  Pundits are preoccupied with how the economy will affect the November elections, and who will be blamed.  They seem to be less concerned about how it is affecting our lives.

We are in uncharted territory.  What experts choose to call it depends less on what they know than what their theories suggest.  Those who minimize the radical nature of what we are experiencing – who call it a “Recession” of one kind or another – are trying to fit it into the conventional framework of the booms and busts we have lived through since the end of World War II.  The underlying message is: “It’s bad, but not that bad.”

Reinhard and Rogoff are trying to take a longer view, actually an eight-century view, perhaps more of interest to economists and scholars.  The policy implications of that are not yet clear.

Krugman, on the other hand, views the crisis as a critic of government policy.  For him, a mistaken emphasis on the perils of deficit spending will recapitulate the mistakes that led to the “Great Depression,” virtually insuring that it will happen again.

It would be a mistake to see these differences as abstract disputes, relevant only to specialists.  Each suggests a different level of urgency in combating the deprivation and pain of unemployment, closed schools, reduced services, and financial insecurity.

Business as Usual for BP

BP denies it “cut corners” in its drilling operations in the Gulf of Mexico, but how do you distinguish “cutting corners” from making a series of “cost conscious decisions”?  According to The Wall Street Journal, being “cost conscious” seems to have meant cutting out a number of safety steps.

In one email, written shortly before the explosion on Deep Water Horizon, a BP official wrote about a decision to deploy 6 stabilizers, instead of the more costly and time-consuming 21 recommended by its contractor:  “Who cares, it’s done, end of story, will probably be fine.”  Needless to say it wasn’t “fine.”  (See, “BP Focused on Costs.”)

Why should we be surprised? No doubt this sort of thing happens all the time. Cutting costs is what business is supposed to do, whether it is designing more efficient assembly lines or distribution centers, streamlining benefits, outsourcing services, replacing domestic workers with robots or local operators with sophisticated call centers, etc.  This has become all the more crucial as the pressures of investor capitalism have made the bottom line more important than any of the other factors that businesses have normally tried to balance.

According to The Journal, Tony Hayward, the CEO of BP, “repeatedly said he was slaying two dragons at once: safety lapses that led to major accidents . . . and bloated costs.”  But an internal report noted a common theme:  “a failure to follow BP’s own procedures and an unwillingness to stop work when something was wrong.” (“As CEO Hayward Remade BP, Safety, Cost Drives Clashed.”)

This reflects a disconnect inside the organization.  No doubt Hayward was sincere in his efforts to improve safety, but it wasn’t translated into procedures and policies in the field.  That is, it did not lead to an awareness of how the pressure for greater efficiency would in fact drive employees to take risks when the alternative was to increase expenses or miss deadlines.  Success in production was noted, safety seldom seen – until disaster struck.

“Workers had ‘high incentive to find shortcuts and take risks,’ said a former BP health and safety manager on rigs . . . . ‘You only ever got questioned about why you couldn’t spend less—never more.’”  One consequence of such a management style, of course, is to push blame further down the chain of command.  Upper managers can think they are doing their best to promote safety because they ignore the pressure they are putting on employees in the field to compromise.  Employees are congratulated and rewarded when they make their targets  — and blamed when “accidents” happen.

This is a typical feature of bureaucracy.  But how to correct for it?  One solution would be to install an officer at the top whose job it was to monitor safety, a Chief Safety Officer, who had the power to intervene in operations as needed.  But a cruder and perhaps better solution would be to make sure the cost of such a mistake was so high that the company would be profoundly incentivized actually to put safety first.

If the cost of a major accident was the risk of bankruptcy, that might lend new meaning to the term “cost conscious.”

Another Way to Combat Financial Intimidation

Most of us who approach bankers — or even lowly “loan officers” or “relationship managers,” as they have come to be called – experience some form of intimidation.  They have the money we need and the power to say “no.”  It’s an unequal relationship.

Emphasizing that fact, banks used to be housed in imposing fortresses or temple-like structures.  Moreover, they were usually staffed by members of the establishment, coming from families that enjoyed privileged relationships with old money.  That was before banks got into consumer services and started making a concerted effort to be more friendly.  But they still have a lot of power, and they still make us anxious.

Dylan Ratigan, former financial advisor on CNBC, coined the term “banksters” to help us shift perspectives.  The difference between banksters and gangsters, he argues, is simply that banksters have the government behind them:  “the ‘vampire’ banks ‘have assumed control of our government.’” (See, “From CNBC Business Journalist to Critic of Bankers on MSNBC.”)

Like gangsters, they often have cozy relationships with “friends” in high places, friends who instead of monitoring their actions offer tips about opportunities to make a killing.  They help to change the rules when the banksters can’t find ways around them.  The banksters get richer and richer, even when they don’t seem to earn the “profits” they generate.  And when they make disastrous mistakes, they manage to make it the public’s business to rescue them, because they are “too big to fail.”

Most of us, to begin with, tend to be anxious and insecure about our own personal financial decisions.  We think banksters know better – and maybe they do, as that is what their business is all about.  But they’re not on our side.  We can’t count on them to have our interests at heart.

But, more importantly, apart from the analysis Ratigan offers of the specific sins of banksters, the term he uses takes them down a notch and strips away the mystique.  And because in my mind, at least, it echoes with “prankster,” it makes them also a little silly.  That helps to undermine the intimidation.

Anything that restores the balance, that minimizes our perception of their omniscience and increases the power of our own judgment, gives us more of an advantage in this unequal struggle.   Skepticism, is helpful.  We may not actually think they are thieves and scoundrels, but they do not deserve the unthinking respect they have been receiving.

The recent credit meltdown also makes clear that, at the very least, they are fallible and careless with other people’s money.  We shouldn’t forget that.

What You Can’t Say About Your Boss

By all accounts – including the now infamous profile in Rolling Stone – Stanley McChrystal is a brilliant, resourceful, brave and aggressive general.  So how did he manage to get himself fired?

It wasn’t because his strategy is failing, though it may be.  Nor was it because of his shortcomings as a leader.  Even Obama praised him for that last week for that.  His failing was being disdainful and contemptuous towards the civilian diplomats and politicians in the administration with whom he was forced to work.

According to Rolling Stone, in the year he has been in charge, “he has managed to piss off almost everyone with a stake in the conflict.”  But the article singles out derisive comments by his staff about Vice-President Biden, National Security Advisor Jim Jones, a “clown,” Special Representative to Afghanistan Richard Holbrooke, “a wounded animal,” and long-standing hostility towards U.S. Ambassador Karl Eikenberry.  McChrystal was also critical of politicians like McCain and Kerry who, says another aide, “turn up, have a meeting with Karzai, criticize him at the airport press conference, then get back for the Sunday talk shows. Frankly, it’s not very helpful.”  (See, “The Runaway General.”)

The profile makes it clear that McChrystal has a strong rebellious, anti-authoritarian streak, one that has gotten him into hot water a number of times in his career.  Moreover, it is not surprising that generals engaged in combat are often hot-tempered and impatient of the restraints that impede their job.  They are, after all, closer to the action and to the men whose lives are on the line.

Nor is it a bad thing that those burdened by such responsibility have the opportunity to let off steam, expressing their frustration at those who are more detached from battle, more caught up in their own careers.  Indeed, it is probably a sign of his effective leadership that McChrystal was able to wield together a team that encouraged loyalty and the frank expression of feelings.

So all of this might never have become a problem if Michael Hastings, reporting for Rolling Stone, hadn’t quoted their comments so fully.  On the other hand, Hastings was doing his job of covering the war and providing journalistic insights.  And he was operating in a culture that more and more has come to value transparency, unfettered access to raw information and frank opinions.  Indeed, it was a sign of McChrystal’s sophistication and self-confidence that he was willing to let journalists have access to the nitty-gritty details of running a war, unwilling to settle for the canned and carefully spun information they usually get.

No doubt that was also another way for him to be anti-authoritarian and unpretentious.  And yet, clearly, it was also disastrous.  According to Rolling Stone, he had the chance to review the article before it was published, but did not object.  Once published, the President had no choice but to fire him.

Was it just McChrystal’s arrogance that made him think the truth of his raw opinions could be – or ought to be – tolerated by the administration?  Or was he so angry that he didn’t care?  If they couldn’t stand it, he may have thought, did he want to keep his job?

Chances are he did not think through the implications of allowing the public a candid look at his frustrations.  Perhaps he did really believe in the overriding value of transparency.  But, perhaps, he wanted the public to know how inept the diplomats he had to deal with were – and, in the heat of the moment, he didn’t care what the price of that disclosure might be.  Maybe it was simply retaliation.