Can We Justify the Gap Between CEO and Worker Pay?

In a 2014 article in Forbes, Kathryn Dill highlighted how “with CEO compensation analysis season in full swing, the AFL-CIO released data (in April 2014) stating that American CEOs in 2013 earned an average of $11.7 million - an eye-popping 331 times the average worker’s $35,293; where information is further broken into categories including compensation by industry and state. As of April 2014, Michigan, Nebraska, and Rhode Island have the greatest CEO to minimum wage worker pay ratios, with New York and Colorado following close behind.”

 

This perspective is supported by further research highlighted by Schuyler Velasco who mentions that “worker pay has been a big story in 2013, with worker strikes in the retail and fast-food industries putting a harsh light on anemic wage gains alongside ballooning corporate profits. Now, a new study from NerdWallet and Glassdoor.com highlights just how vast the wage gap is in major US companies, comparing how much the United States' highest-paid chief executives make in an hour with the average hourly wage of their employees. Can you guess which company had the highest pay gap?

 

McDonalds: CEO: Donald Thompson

 

Average hourly worker wage: $7.73

 

CEO hourly compensation: $9,247 (1,196 times the average worker wage).

 

The next 9 companies with the highest pay gap between the CEO and the average hourly worker were;

 

Starbucks: CEO: Howard Schultz, hourly compensation = $9,637 ((1,096 times the hourly average worker wage of $8.79);

Dollar General: CEO: Rick Dreiling, hourly compensation = $7,720 (1,007 times the hourly average worker wage of $7.67);

GAP: CEO: Glenn Murphy, hourly compensation = $8,209 ((947 times the hourly average worker wage of $8.67);

T.J.Maxx: CEO: Carol Meyrowitz, hourly compensation = $7,256 (924 times the hourly average worker wage of $7.85);

Target: CEO: Gregg Steinhafel, hourly compensation = $6,882 (824 times the hourly average worker wage of $8.35);

Walmart: CEO: Mike Duke, hourly compensation = $ 6,898 (779 times the hourly average worker wage of $8.86);  

CVS Caremark: CEO: Larry Merlo, hourly compensation = $6,777 (769 times the hourly average worker wage of $8.81);

Best Buy: CEO: Hubert Joly, hourly compensation = $6,517 (666 times the hourly average worker wage of $9.78);

AT&T: CEO: Randall Stephenson, hourly compensation = $7,412 (558 times the hourly wage of an average worker of $13.28).

 

These figures should shock even the most liberal believers when it comes to executive pay. Even if you reduce the CEO hourly compensation by half, compensating for tax for example, the figures are still impossible to justify, surely.

 

The biggest problem is that even when these figures are ‘out there’ for everyone to see – and 99.9% of people find them unjustified – nothing actually happens to change the ‘status quo’ and in fact it appears that the gap just keeps on getting bigger

 

Velasco goes on to highlight how “wage inequality is becoming a growing concern, both on the ground and at the political level. The wealth gap between the top 1 percent of American earners and the other 99 percent is as wide as it’s been in nearly a century. Corporate profits and stock holdings have soared in value, while the federal minimum wage has remained unchanged since 2009.”

 

So how has this gap been allowed to develop over the last 10, 20 years, especially taking account of one of the worst global financial crashes in our time and more importantly what can be done, in practice, to narrow the gap to a more equitable and justifiable pay scale. Because it appears that though many in academia, the media and definitely at the worker level are strongly opposed to the current pay anomalies – no one has the ability or influence to change this behavior by corporate boards and their shareholders. As we must never forget that it is the boards and shareholders that ratify executive compensation packages on an annual basis.

 

Kathryn Dill pulls no punches when she states that “America’s CEOs, as exemplified by the individuals of companies like Wal-Mart, Darden Restaurants and T-Mobile, are cannibalizing their own consumer base,” by taking money out of the pockets of their workers and putting it into the pocket of the CEO.

 

This isn’t just a US phenomenon and Gretchen Gavett points to research by Chulalongkorn University’s Sorapop Kiatpongsan and Harvard Business School’s Michael Norton that concluded “we’re currently far past the late Peter Drucker’s warning that any CEO-to-worker ratio larger than 20:1 would ‘increase employee resentment and decrease morale.’ Twenty years ago it had already hit 40 to 1, and it was around 400 to 1 at the time of his death in 2005. But this new research makes clear that, one, it’s mindbogglingly difficult for ordinary people to even guess at the actual differences between the top and the bottom; and, two, most are in agreement on what that difference should be.

 

The lack of awareness of the gap in CEO to unskilled worker pay - which in the U.S. people estimate to be 30 to 1 but is in fact 350 to 1 – ‘likely reduces citizens desire to take action to decrease that gap,’ says Norton. (Though he notes some movement on that front, including an unsuccessful vote in Switzerland to cap the ratio at 12 to 1 in 2013 and recent protests by fast food workers in the U.S.)”

 

Michael Norton concludes by stating “many of the heated debates about whether CEO pay should be capped or the minimum wage increased are debates based on an extreme lack of knowledge about the true state of affairs. In other words, both liberals and conservatives fail to accurately estimate the actual current gaps in our pay. Our hope is that presenting the data to all sides might force people to examine their assumptions about whether some people are making more than they would like, and others less.”

 

References

 

Dill, K. (2014). Report: CEOs Earn 331 Times As Much As Average Workers, 774 Times As Much As Minimum Wage Earners. Forbes, 15th April.

 

Gavett, G. (2014). CEOs Get Paid Too Much, According to Pretty Much Everyone in the World. Harvard Business Review, 23rd September.

 

Velasco, s. (2013). CEO vs. worker pay: Walmart, McDonald’s, and eight other firms with biggest gaps. The Christian Science Monitor, 12th December.

Where are all the Successful SME Leaders?

There is plenty of research on small and medium sized business failures – for example, 50% of all UK based small/medium enterprise (SME) start up’s fail within the first five years, where many reasons are cited, from the UK tax system and the lack of bank lending, to the failure to plan and budget correctly.

 

In the USA, according to Bloomberg, 80% of SME start up’s ‘crash and burn’ in the first 18 months, where the reasons for failure include (a) not really being in touch with their customers; (b) no real differentiation in the market (i.e. the lack of a unique value proposition); (c) leadership breakdown at the top (founder dysfunction); and the inability to turn a potentially great business model in a proven business with a regular, sustainable revenue stream.

 

With these kind of odds though, a successful SME must be led by an amazing person or persons, and yet where are they and why don’t we hear from them. Imagine the stories, good and bad, they have to share with all of us and how much we could learn. And how their wisdom and experience could start changing the odds in the SME start-ups chances of success.

 

‘Big’ business leaders get all the attention – in the media, print press etc – we hear about the large corporate successes and get the advice of the large corporate CEO’s and entrepreneurs – but at the size they are at, failure is only really an option if they mess up really, really badly year after year.

 

But the successful small business leader is someone truly special. They are used to dealing with risks and market ‘issues’ on a constant basis and they have the ability to ride the waves to sustainable success. They operate in an environment where the loss of a single customer can put their cash flow under pressure and they are able to re-align and adapt to ensure organisational success.

 

‘We’ can learn so much from these special people – but we hardly ever get a chance. Most of the ones I know are highly successful and remarkably humble people. You could be standing next to them in a queue or sitting next to them on a plane and you would never know just how brilliant these people are.

 

The mainstream business press doesn’t seem to want to recognise their success – where they may get a mention if they donate a significant amount of cash to a charity or something similar – and their business may get a brief mention as an editor’s afterthought – missing the pot of gold just sitting there in front of them.

 

As just one of many examples, I know a brilliant SME owner who applied for his company to be considered for the Queens Award for Innovation in the UK. He had innovated some truly remarkable changes in his business manufacturing methodology that had reduced his manufacturing costs by some 40% - which obviously has a huge impact on the bottom line, especially if you’re in a market where you don’t need to reduce the selling price. But because the company didn’t show an increase in revenue, the award committee turned down the application.

 

How crazy and short sighted is that. Business isn’t just about revenue, it’s ultimately about the whole financial stream and especially net profit. So while this SME leader might be smiling on his way to the bank, the government seems to be as blind to their success as the media are.

 

Some of the business principles and traits I’ve noticed from successful SME leaders include;

 

1) They appreciate the value of money – often coming from humble backgrounds they don’t take ‘profit’ for granted and spend wisely;

2) They know their staff – and inspire and motivate them;

3) They are natural innovators and know how to make things happen;

4) They aren’t afraid to ask for help in areas they know aren’t their strengths;

5) They are transparent leaders;

6) They aren’t afraid to take risks – and excel at evaluating risk and reward;

7) They are humble and don’t look for attention outside of their own business;

8) They put their customers first;

9) They work hard.

 

Maybe if we spent more time learning from the small percentage of truly successful SME business owners, the overall percentage of SME successes could increase dramatically, which would have a huge impact on economic growth. Further still, rather than us just hearing and being ‘directed’ to learn from ‘big’ business – maybe big business could learn more from successful small and medium sized businesses, especially in the realms of leadership, customer service, real risk taking, employee motivation, – in fact the list is endless.

Why Wouldn't You Want to be Authentic at Work?

Herminia Ibarra suggests in her 2015 article ‘The Authenticity Paradox’ in the Harvard Business Review that “a too rigid definition of authenticity can get in the way of effective leadership” where she lists three examples and the problems they can pose;

 

The first is “being true to yourself: Which self? We have many selves, depending on the different roles that we play in life. We evolve and even transform ourselves with experience in new roles. How can we be true to a future self that is still uncertain and unformed?”

 

But being truly authentic recognises the different roles we may ‘play’ as Herminia phrases it – where at the outset I’m not convinced ‘play’ and ‘authenticity’ belong together. If we are genuinely authentic people then we recognise how we ‘operate’ in different situations, are happy to be open about the different styles we may adopt and are well grounded in respect of our strengths and weaknesses in these different situations.

 

Transforming ourselves through our careers doesn’t stop us being authentic – and we can be true to a future self as ‘we’ know the kind of employees, managers, leaders we want to become and again are happy to be open about it as well as the ‘concerns’ we might have about that future self. Truly authentic people use the vision of their ‘future self’ to help them develop – where these employees are often driven to ‘plan/suggest’ their own personal development significantly more than other employees that hide their authentic self to play the corporate game – where these unauthentic people are unsure of the ‘future self’ they want to become and allow their development to be led by the organisation.

 

Her second example is “maintaining strict coherence between what you feel and what you say or do. You lose credibility and effectiveness as a leader if you disclose everything you think and feel, especially when you are unproven.”

 

Again there are inconsistencies in this statement – for example, the suggestion that you lose credibility and effectiveness as a leader if you disclose everything you think and feel, lacks substance, as authenticity doesn’t imply that you do this in the first place. Authenticity by its very definition allows you to tell people, for example, that there are certain operational issues you can’t discuss for whatever reason or tell your team that how you feel personally isn’t important to the required goal – this is still being authentic as long as you are consistent too.

 

Also some may argue that the time to be fully transparent is when you are unproven – as it allows your team to ‘understand’ your actions and approach more clearly; and allows them along with your manager to give more authentic feedback on your approach. If you’re hiding your real self as you’re developing as a leader – then the feedback will create unnecessary problems as you have to either explain yourself or become more authentic.

 

Herminia’s third example is “making values-based choices. When we move into bigger roles, values that were shaped by past experiences can lead us astray. For instance ‘tight control over operating details’ might produce authentic but wrong-headed behaviour in the face of new challenges.”

 

But again there are inconsistencies with this example too. For instance organisations should have their own corporate values that don’t change as you move up the corporate ladder – employees should ensure that their personal values meet the corporate values when they join the organisation – though more often than not this is more of an afterthought, or something employees learn once they’ve joined their new employer. Though to be honest if the interview process is handled professionally each party should be clear that their values aren’t just clear and understood – but that they match as well.

 

‘Tight control over operating details’ is a very strange value, regardless whether it’s a personal or corporate value. It seems to describe a management style which would contradict with normal organisational values like empowerment, trust, etc.

 

It will be a sad day for business and students preparing to enter business, if ‘corporate advisors’ start, or rather continue to suggest that employees and employers shouldn’t be authentic in work all the time – as this will lead to a distrusting culture which will create a self-fulfilling prophecy of despair and distrust in all aspects of the business and eventually lead to a lack of authenticity, being replaced by corporate politics and game playing.

 

Leaders need to treat their employees as mature and trustworthy if they want to optimise their future sustainable growth – failure to do this will take us back to the days of command and control leadership, distrusting organisations, employees working with their own futures in mind (and not that of their organisation) – which leads to the two-headed corporate image; the false external one of this happy and content organisation given to customers, suppliers and other external stakeholders and the real internal image that wrecks of infighting, back-stabbing and command and control bullying.

 

There are still two very distinct types of organisations – the first has a positive culture that makes transparency and authenticity easy and natural behaviours at all levels of the organisation and then sadly there are still too many negative organisational cultures that create environments that aren’t conducive to being authentic and ‘force’ employees to play corporate games to ensure their survival.

 

It’s up to each one of us to ‘show’ the real benefits of being authentic – as even in the negatives cultures, individuals will learn that you are someone who they can trust and rely on and in the end you will come out a winner, as will the organisation.

 

References

 

Ibarra, H. (2015). The Authenticity Paradox. Harvard Business Review; Jan-Feb; p.52-59.

  

 

 

Why Do We Still Have Problems Finding Good Leaders?

Leaders inspire and motivate their employees to be the best they can be where, through authentic people conversations they match their employee’s goals and future aspirations with their business needs ensuring a win-win for the whole organisation.

 

Matching employee’s needs with organisational needs starts at the recruitment phase, where logically you have to make sure you get the right people ‘on the bus’ in the first place. Then it’s over to the leadership to inspire and motivate their people to achieve the best results both now and into the future, while taking the employees on a journey of fulfilment.

 

Sure this utopian scenario assumes a level of maturity from both leaders and employees that is often sadly lacking in many organisations – but that in itself doesn’t mean it isn’t a cultural strategy that all organisations should be striving for.

 

We all know how a great leader should act – it’s not rocket science; and we definitely don’t need loads of fancy titled leadership models to tell us what we already know – what we do need are ‘boards, owners and stakeholders’ to demand ‘great leadership’ in their organisations at all levels and not to be scared to remove those that don’t lead effectively. With leadership comes accountability and hence by definition we must hold leaders to account.

 

Of course social media has given everyone a voice – but ‘we’ need to be able to see past the personal punting for work and the authentic comments on leadership. It really isn’t that complicated but us humans seem to be brilliant at making simple things complicated – often driven by the dream of extraordinary wealth and commercial success; and/or personal recognition and ‘fame’.

 

So if we know what makes a good leader what are the biggest problems with leadership ‘on the ground’ in today’s global economy;

 

1) That it’s not just about looking at operational results – but also about looking at how those results are achieved. Many command and control type leaders, who are de facto poor leaders, will argue vehemently that their results prove they are good leaders, and are often naively unaware just how demotivated their workforce actually are – and to be honest not really caring either.

 

These poor examples of leaders are often ‘brilliant’ at claiming their style is perfectly fine – since when they are asked to change and be more inclusive, results often drop, giving the command and control leader ammunition to argue how things are no longer working as well as they used to be.

 

Of course the real problem is that their staff are just totally confused with a change in style. For example, the ‘bad’ leader is often asked to start looking at delegating tasks and empowering employees more – but in a manipulative way they simply abdicate tasks to employees without any discussion and support – virtually guaranteeing that this ‘new style of leadership’ is bound to fail.

 

2) We mustn’t underestimate the effect of leadership ‘power’ on individuals. I’ve seen ‘normal’ employees turn into rampant narcissistic, power crazed leaders as soon as they are given their first leadership assignment. It can be quite a shock to the system and makes one wonder what made this person change – and more importantly how on earth the organisation can get the ‘old’ person back again.

 

Weirder still is that the individual who has just turned into this ‘narcissistic’ nightmare often isn’t even aware they are doing something wrong. These people often struggle to find their way in the organisation – as former colleagues who respected them – start to distance themselves.

 

Seeing ‘the gap’ – the new leader often reverts to using even more power to get his or her team around them – just alienating them even more, until there is a complete meltdown. Sadly the narcissist often survives and members of his team become scapegoats and the remaining members, fearing for their jobs, just learn to not like it but just lump it.

 

3) Leadership styles differ around the world and do differ significantly. These styles are often driven by cultural and historical differences; and commentators should be careful on two fronts. First is to assume that their style is ‘better’ and thus they try to impose their style when operating in foreign countries, without even trying to understand or assimilate to their host’s culture.

 

Second is to criticise leadership styles in other countries without having experienced the culture first hand. Two of the most basic barriers to effective leadership are arrogance and ignorance.

 

4) Followers must learn to speak up about poor leadership. It’s often been said that the one thing that’s common with a bad leader is that they have bad followers. That statement is a bit too glib without understanding the circumstances in which the followers are operating – but there does come a time when unfortunately the statement is true – and the ‘bad’ followers through their silence just fuel the poor behaviour of the bad leader.

 

We all know the attributes and behaviours of a good leader and don’t need fancy leadership titles to help us in this regard – if in doubt, just get a group of people together and ask them to write down what makes a great leader – and it’s a pretty good bet that in every instance you’ll get the key points of a good leader.

 

The problem seems to be that although leaders know what they should be doing, they are just bad at implementing the behaviours on a day-to-day/situation-by-situation basis. Leaders need to learn to self-reflect and hold themselves to account to the highest leadership standards – and if we can get them to do that, then we will see an immediate, positive difference in leadership and employee behaviour as well as sustainable organisational performance.