On Sun, Jul 22, 2001 at 03:40:36PM +0200, J. van Baardwijk wrote:
> In the last few years, the top management of large companies in The
> Netherlands have received an awful lot of criticism because of the
> outrageous annual pay raises they give themselves. Those managers'
> salaries are already measured in millions of guilders, but raises of
> 20%, 30%, or in the case of ABN-AMRO (a major bank) even almost 50%
> (!) happen every year. At the same time, these same managers call in
> unison "we can't afford that" or "that would hurt the economy" when
> the unions want a mere 3-4% raise for the workers.
I've been thinking about this issue recently myself. What do you think
should be done about it?
Some might argue that the huge salary is "worth it" since the skills of
the CEO in question result in increased profits for the company that
exceed the salary of the CEO. A reasonable argument, but how does one
verify it? Why is CEO #1 worth $1M while CEO #2 is worth $3M and CEO #3
is only worth $0.2M ?
Also, maybe distributing that same money as a raise to the workers would
increase productivity or attract better workers such that profits are
increased more than they would be by giving the money to the CEO. Or
maybe not.
The root of the problem, it seems to me, is that few people really
know how to value the CEOs and workers in relation to the possible
profits of the company. The CEO's salary is generally set by the board
of directors of the company, but is this decision made rationally? In
many cases, I don't believe so. The CEOs often seem to be treated almost
as a commodity, so the salary gets bid up higher and higher because
there appears to be a tight market for CEOs. But surely some CEOs are
geniuses and some are incompetent. Is the board really able to determine
this reliably? (My single anecdotal evidence says no: the company I work
for has been run into the ground over the past year by an incompetent
CEO who made about $0.6M over that period, $0.25M of it as a cash bonus
paid out when the ship was already sinking)
As far as distributing the money among the workers as opposed to the
officers, one difficulty is that the human resources department tries
to keep salaries secret. (more anecdotal evidence: when I got a raise
earlier this year, I was asked to sign a document stating that I would
not discuss my salary with others in the company). On the other hand,
information on the salaries of officers of public companies is easily
available on the web. It is much easier for a person to negotiate a
raise when they can point to higher salaries of others in a similar
position.
Anyway, what to do? I'm not sure -- I'm still in the brainstorming
stage. Here are some ideas that spring to mind:
1) There needs to be a well-researched way of evaluating the performance
of the officers of companies. Some system that is respected and can
be applied by the board of directors or their agents to determine the
value of a CEO. This seems rather obvious, so perhaps accountants have
written books on it already? If so, why isn't it better applied? Are the
officers usually buddy-buddy with the board of directors?
2) What about not paying officers any salary at all, but rather just
paying for performance (i.e., profits). This could be done with stock
options, bonuses pegged at a percentage of profits, etc.
3) How about having public companies disclose salaries and compensation
for everyone, not just the officers?
4) Should it be easier for shareholders to sue the board of directors
when the board is negligent in choosing the officers or in determining
their compensation? Maybe shareholders should pressure the board to
always have a shareholder vote to determine officer compensation?
--
"Erik Reuter" <[EMAIL PROTECTED]> http://www.erikreuter.com/
