THE BLAME GAME
The world financial crisis has reared its ugly head, bringing with it a lot of finger pointing. In typical western society fashion, nobody was prepared to foster any of the blame and everyone was looking for a scapegoat for the collective misery of society.
This finger pointing behaviour is an ugly trend itself. You only have to look at the amount of extreme litigation that is present in western societies, where the act of suing your neighbour has almost become a national pastime in some countries. Warning signs and disclaimers are plastered over the streets and across almost all product packaging. Toilets required to have a warning label advising people not to drink the water; boxes of matches advise the user that the contents are flammable. These examples might sound silly but they are in fact real, and demonstrates the present state of our society. Nobody is willing to accept the repercussions of their own actions anymore.
Much of the blame for the financial crisis can be attributed to the overspending of consumers. The typical consumer may earn $4,000 per month, but that same consumer then goes out and buys an overpriced house with payments of $3,000 per month, fancy car at $1,000 per month and non-stop shopping with credit card debts of another $1,000 per month. Hang on: don’t they realise they are spending more money than they earn and still don’t have any left to buy food?
Of course it’s not their fault that they spend more than they earn, so they need to find someone else to blame. Each month they select a new victim to undergo a thorough grilling on the world financial crisis bbq, and the latest to be thrown onto the hotplate are the corporate executives with their excessive pay packets.
EXECUTIVE PAY LEVELS
The issue of corporate executive income levels has been on the radar of consumer groups and the media for quite some time. However, they were never able to generate enough consumer sentiment to create real noise about the topic. Times were good, so the executives must have been doing a good job.
But now that times are not so good, and Australians are starting to feel the pinch with massive job cuts and rising unemployment, the same executives doing the same job as before are being singled out. Before pointing the finger at executives and playing the blame game, the issue of their pay packets should be considered from an unbiased point of view.
So are executives paid too much? What might appear to be a simple question actually has many factors attached to it not normally considered by those outside of the board of directors. Quite simply, no single person’s influence is directly worth the current pay levels, but they can have an enormous influence in other areas that could indirectly impact on success or failure.
CEO’s are considered to be the driving force behind a company, through the implementation of their innovative ideas to move the business forward in a positive direction. When you consider that a CEO of a leading Australian firm could be on a $5 million pay packet, surely it makes more sense to hire five people at $1 million each to take advantage of their combined business acumen and knowledge.
PAY PACKET REASONING
The most common reason given to explain the incredibly large income levels of the executives is market demand. To attract the best CEO’s and other executives, the company must pay top dollar, as they are competing with companies all around the world. This is only partially true though. Whilst it is true that to acquire the services of some CEO’s they will need to pay top dollar, what they don’t mention is that in the majority of cases they are just buying a name, not necessarily abilities.
For a company to hire an executive team on low pay packets, rather than an executive team that possess equal ability but have triple the wage expenditure, it could potentially have disastrous effects on the company. For the general public, this reasoning seems ludicrous, which is why there is such a huge public outcry over this issue at the moment.
The best way to explain the reasoning behind such decisions, is to use a real life example. Michael Jordan was possibly the greatest basketball player of all-time and won six world championships with the Chicago Bulls. After retiring from basketball at the end of the 1997/98 season, he returned to play two more seasons with the Washington Wizards when aged almost 39.
Washington was a struggling team, with no hope of winning a championship, let alone making the playoffs. So why did Jordan return and why did Washington hire him? The decision was purely a marketing move. The sum of money that they spent securing the services of Jordan, was abundantly returned in terms of increased merchandising and ticketing revenue. If they needed funding for a stadium expansion or other franchise expenses, Jordan was their ticket to getting the funding approved.
Jordan was not hired for his on-court presence and basketball abilities, nor was he hired to help the team win more games or make the playoffs. He was hired for name only, and what he could provide to the team in terms of increased revenue and franchise stature.
EXECUTIVE IN NAME ONLY
Just like Mike, the executives are hired mainly based on the positive effects they will have on the company in areas other than the balance sheet. The main measure of the effectiveness of an executive is not how much profit the company is making, but rather how much the share price is increasing.
The board of directors, the shareholders, and in most cases the executives themselves since they generally receive large amounts of shares as incentives, are all interested in ensuring that the share price remains on the up. Dividends paid on company profits are notably minimal, leaving shareholders with the objective of increasing their wealth through positive share price movement.
As share prices are heavily influenced by speculation, the appointment of a big-name CEO usually results in a massive increase in the company’s share price. Similarly, the appointment of a chief executive nobody will almost certainly trigger a share price plunge. From the point of view of a director on the company board, they would never put the bottom line of the company before securing an increase in their personal wealth. The wrong CEO appointment could slash a huge portion from their assets and result in them being removed as a director in the ensuing shareholder backlash.
Apart from a big name being an important factor in the executive selection process, a big salary package is equally important. The share market also considers a low pay packet to equate to a low quality executive. So even a big name on a low package could spell trouble for the company’s stock value.
A high salary package will have a number of other positive implications for the company apart from the share price influence, including developing business relationships and securing funding for expansions and new projects. The banks are known to be heavily influenced in their lending approvals by the presence of a proven, experienced CEO with a generous salary. This point alone could prove to be a make or break experience for many companies, with the lending market shrinking and funding becoming harder to secure.
A LESSON LEARNED
Just because you have lost your job or your financial world is tumbling down, there is no need to jump to sudden conclusions about executives pay levels. After careful consideration of all the facts, the question of whether the corporate executives are paid too much isn’t so clear cut after all.
Maybe the public could put themselves in the shoes of a shareholder of company XYZ. They could be a typical mum and dad investor who could lose a large portion of their retirement savings based on the appointment of a cheaper CEO.
What about being in the shoes of an employee of company XYZ? Imagine a blue-collar worker working for 30 years in the same company since they left school. The appointment of a cheaper CEO could result in the declinal of a crucial application for additional funding necessary to ride out the tough times, and result in the loss of thousands of company jobs including their own.
If the fuss-makers learn anything from these troubled times, it would be to stop worrying about matters that have nothing to do with them. Instead, they should take action to correct their own situations and circumstances, rather than trying to drag other people down into their pool of despair.