Why excessive executive pay is a mistake
Commentary:
When David Winters, a longtime money manager, read the Coca-Cola Company's annual report recently, the amount of stock put aside to reward the company's managers stopped him in his tracks. Over the next four years, some $13 billion of stock was set aside for company executives. This would have meant that fully 14.2 percent of company stock was being used to motivate a management team already well paid. According to the New York Times, Winters argued that "it is unfathomable that they would require such astronomical sums of money to provide motivation."
It isn't just unfathomable. It's wrong. Why?
First of all, money isn't a great motivator. While it may offer temporary delight, its value soon wears off. We all accommodate to what we get, so its value as a long-term incentive is slight.
Moreover, money inhibits our sense of social connectedness. In a series of intriguing experiments, students were asked to play Monopoly. When they were done and leaving the lab, an assistant crossed the room and spilled a box of pencils. Here was the focus of the experiment: Which students would prove most helpful? The ones who had made the least amount of money in the game. All over the world, there have been any number of permutations of this kind of research -- some in labs, some in the real world -- and they all point relentlessly to the same conclusion: Money cuts people off from one another.
This isn't really so remarkable. When I fly in a private jet, drive in a limousine, stay in luxury hotels where my every need is catered for -- all things I have done at some stage -- at first this is all delightful. Then it's normal. Then it's an entitlement. I've watched this happen -- to me and to others. The luxury has corroded my sense of self as normal, imperfect, just like everyone else. If I believe the money, then I imagine I am better, different and separate from other people.
Moreover, geographically the money also separates me from everyone else. On private planes I don't have to sit next to crying babies. Eschewing public transportation, I don't have any sense of public mood or morale. Behind tall gates, my home provides splendid isolation.
All of this is exactly what you do not want in managers who are supposed to be connected to their market and their workforce. It's a recipe for arrogance, not motivation. Or, as Anthony Salz wrote, when investigating the manipulation of LIBOR rates at Barclays Bank, "Elevated pay levels inevitably distort culture, tending to attract people who measure their personal success principally on compensation . . . Many interviewees [reported] a sense of an entitlement culture." Companies that pay excessively isolate themselves and their executives from the societies they ostensibly exist to serve.
The old argument -- that you have to pay to secure real talent -- is exactly wrong. If you have to pay to get or keep your talent, you end up with the wrong person. Consider instead the view of Charles Munger of Berkshire Hathaway: "People should take way less than they're worth when they're favored by life," he says, further arguing that when you have risen high enough, you have a "moral duty to be underpaid -- not to get all you can, but to actually be underpaid."
And Munger stood by his belief, resolutely paying the CEO of Costco (a Berkshire Hathaway investment) less (in cash and stock) than his peers were paid running Walmart, Home Depot or Target. Since Berkshire Hathaway is a big investor in Coca-Cola, it will be interesting to see how it responds to the stock allocation that has so riled David Winters.
Exorbitant pay isn't -- or shouldn't be -- news. That it continues to be so can only be explained by one thing, as one senior executive commented to me recently: Everyone hopes somebody else will go first -- and reduce pay. All the boards want to. Most of the CEOs want to. They all know it needs to happen. But no one wants to be first. You could call it the biggest game of chicken the world has ever seen.
