Talent Management Column

Executive Comp for the Average Joe

Taking the arguments used to justify the huge bonuses and applying them to the rank-and-file highlights some unflattering assumptions about senior-level leaders. HR executives may want to take note of the differing viewpoints -- and think about what they mean to their organizations.

Monday, February 1, 2010
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The headlines this past month have been full of accounts of huge Wall Street bonuses and how those firms are bracing for possible backlashes against them. (Apparently the idea of just not paying them in the first place wasn't an option.)

This has shifted attention once again to executive compensation, because of normative concerns about what's fair and acceptable, especially in industries such as finance where performance has objectively been lousy and where government bailouts were necessary to keep them afloat.

Let me first be clear that executive jobs are extremely difficult. It is almost impossible to say in advance what decisions are appropriate for businesses in the contemporary environment where changes are happening simultaneously in many dimensions, margins are squeezed and competition is everywhere. It is not obvious how much people should be paid for such jobs.

I don't see any big moves to moderate executive compensation, though, despite the public outcry.

Even if the incumbents in those jobs are not explicitly defending their pay, there are hosts of supplicants doing it for them. These include their own staff, outside consultants and, yes, academics as well. If there is a marketplace for ideas about pay, it goes where the money is. And so we hear many reasonable sounding and sophisticated justifications -- often conflicting with each other -- as to why it is OK that executives be paid tons of money.

What about the jobs that don't now pay tons of money? Not surprisingly, no one is flocking to generate arguments as to why these workers should be paid more. In fact, the arguments tend to be the reverse, about why wages need to fall to keep businesses competitive.

Given this situation, I think it is only fair that I offer my services as a highly paid consultant to generate arguments as to why the average Joe or Joanne in a non-executive job should be paid a lot as well.

Just to make it fair (OK, just to make it easy, remembering that I'm doing this for nothing), I'm going to adapt the same arguments now used to justify high compensation for executives.


Look at the Value I've Created: A typical argument about executive pay is that when things go well, the CEOs and other executives have generated so much value that paying them what amounts to a small slice of it is fair and reasonable.

It's rarely the case that the executives create all that value themselves, of course. They are responsible for the decisions, but the work to come up with the ideas and then to executive them is done, at least in part, by others.

But let's assume for the moment that the argument has some merit. Here's how Joanne and Joe can apply the same argument: "I stopped a truck on the loading dock from backing up onto a worker today, preventing an accident that surely would have cost us millions in legal costs and damages. It is only fair that I get a share of the value I personally saved for the company. Let's say 1 percent just to be modest, remembering this was all done by me. Please send the check for $20,000 to my account."

Pay Peanuts, Get Monkeys: You want the best executives, right? You should expect to pay above the market average for to get them.

Paying at the 75th percentile is extremely common. The fact that there are a lot of people claiming to be able to do executive jobs is irrelevant. Unless they've done this job already, it's too big a risk to hire them in such a role.

For regular jobs, interestingly, the arguments tend to be the reverse: If we can find someone else who can do it at a lower wage, that's what we should pay.

Ready, Joanne? "The skills to truly understand this job can only be learned here, and you don't want to take the risk of losing me. Remember, turnover costs are multiples of my annual compensation. So forget market wages. I should get a substantial premium. And if I'm paid less than peers working elsewhere, I'm quite likely to feel demoralized and lose my edge."

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(All you need to do is get most employers to agree to pay at the 75th percentile, as they do for executives, then stand back and watch your pay escalate forever!)

I Won't Do My Best Work Without Financial Enticements: A final argument is that we can't expect executives to act in the interests of shareholders unless they have a financial incentive to act like shareholders. And those incentives shouldn't be trivial if you really want to motivate them.

For some reason, when we talk about motivating regular employees, it's all about psychological concerns like engagement and commitment, factors that we address through issues other than pay, such as empowerment. But when we talk about motivating executives, it's all about money.

Here's how we apply the same argument: "You've got to bribe me to look after the company's interests. Otherwise I'm just going to look after myself. Remember, you can't always watch me, and it's impossible to know whether I'm using my best judgment. What I care about is money, so cough it up."

If the arguments used to justify executive pay don't seem reasonable when applied to the average worker, maybe it's time to rethink those arguments.

The assumptions behind them assert that executives are in some way "different," and those assertions are not so flattering, e.g., that executives are motivated by money, while regular workers care about loyalty, teamwork, etc. Is it a good thing in the long run to set up organizations based on two such different models of human behavior?

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School.

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