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Wonderful Life v.2.0
The most interesting chart showing the connection between executive compensation and company performance--also, I suppose, the arguable importance of retention--is the one I saw proudly displayed on a bulletin board at Motorola corporate offices in Schaumberg Illinois in 1994. George M.C. Fisher, the company's widely admired Chairman and CEO, had resigned without warning a few months before to take over at Eastman-Kodak. By all accounts, Motorola had paid Fisher about $5 million and Kodak offered him $100 million in salary and stock options. He was known as a technologist who was also subtle about people and talent--a good man all round. Nevertheless, Motorola's stock price hardly budged at the announcement of his departure and had recovered completely by the time I was there. "If one leader could matter that much," I was told, "then the leader could not possibly have done his job right."
Investors, like the Motorola executives I talked too, were shrewd to shrug off Fisher's departure, much as some regretted losing his friendship. It would be a great mistake to look at Motorola's subsequent difficulties and attribute them to his leaving any more than attribute Motorola's meteoric ascent in the late 1980s to his taking over from (the more justifiably legendary) Bob Galvin. Make no mistake, I admired Fisher a good deal and liked him personally so far as I knew him. One of the reasons he was widely admired was that my fellow Harvard Business Review editor Bill Taylor and I had published an in depth interview with Fisher in 1989. (He spoke about Motorola becoming interested in an IPO. I joked, lamely, that it was curious why Motorola would bother with the Israel Philharmonic Orchestra. We laughed and laughed.)
But largely because of the Galvin family's legacy, Motorola was very much a place of team play. The corporate culture celebrated, without apparent cynicism, practical engineering, customer service, employee development and cosmopolitan openness. You walked around the Motorola cafeteria wearing a gold identity badge if you accumulated patents; Motorola was mentoring the public schools. By 1989, the company's various people had all but invented the cell phone industry, the corporate university, six sigma quality, and were the first to open up the Chinese telecom market. Fisher had contributed to all of these things but was by no means responsible for them. Even as CEO, he sat in a "two-in-a-box" relationship with the COO, Gary Tooker, who took over from him within hours of his departure. Nobody (as Bill Taylor later put it) is as smart as everybody.And Fisher's subsequent run at Kodak was not distinguished. He probably did better than some other leaders would have, given how the advance of digital technology creatively destroyed Kodak's photography business (much as it destroyed the market for Motorola's analog phones, by the way). But Fisher certainly did not "turn the company around." Four years later, his $100 million had shrunk to less than half because of the decline in Kodak stock--a decline that forced him to cut thousands of jobs, but not, revealingly, his own salary. Fisher is now, and has been since 1996, the most powerful director on the board of General Motors. Enough said.
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I'VE BEEN THINKING of Fisher's record, what with the dust-up over AIG bonuses. Okay, who hasn't wondered if America hasn't become what Bedford Falls would have become if George Baily had just taken Mr. Potter's money. Then again, Potter offered $20,000 a year, not $2 million. I have no doubt that Fisher remains an honorable man, as fascinated now about how things work as he was back in Bell Labs in the 1970s, when he toiled away, ahead of its time, on the video-phone. He was probably less drawn to the money than to proving himself, that is, without the Galvin family's prestige blowing at his back. Still, there was a hubris here that feels somewhat beyond Frank Capra's imagination. How did a decent man leading an inventive, collaborative company, someone already earning a hundred times what a public school teacher earned, get up one morning and tell himself he was actually worth 2000 times this?
Ideas about ordinary Mephistophelean bargains seem unimaginative here, for somebody was willing to pay him. This was not just about his weaknesses for power. Greed shmeed. The real question is, how did we get to a public standard that considered business talent in this way? Wall Street, Sinclair Lewis knew, was always just an exaggerated version of Main Street. So how did Main Street--or even HBR readers--get comfortable with the idea that most every senior business executive should be earning something like, say, Mick Jagger?
I know this is complicated, but I think that little acronym IPO is relevant here. I remember Ted Levitt, HBR's chief editor, coming into my office one day back in1989, brooding as usual, but also chewing on an insight, the revolutionary qualities of software. Suddenly, he said, the brain's logic can simply be embodied--"externalized," he said--in film full of electrons. You make it for one, and you've made it for a million. The "marginal cost" of adding a customer, he might have added, is more or less zero. Need I add that this was the time Microsoft stock, and Bill Gates' net worth, was beginning to make MBAs drool?
And Levitt's vision was prophetic in its way. Launching a software company, or a product, with a large component of software, paid you back much the way a hit record did. Suddenly Peoplesoft took off. Suddenly we had Siebel and Netscape. And then Yahoo and Google and Pets.com. What this meant for the business class was that young people did not get just rich. They got hyper-rich. You made it for one and you were making it for a million--or a billion, if you included China and India and Brazil. Twenty-somethings were making more than the entire management of a Fortune 500 company put together.
TO BE SURE, Tom Wolfe had already written Bonfire of the Vanities, and Michael Milken had already copped a plea. So it was not as if we lacked other, less savory models for enrichment. But I don't believe that George Fisher, or AIG executives for that matter, really saw themsleves as masters of the universe, trading and trading, making cut after cut on mega deals. I think they saw themselves as selling "products," indeed that they were making the world more stable. But I think they also assumed that, in joining the heights of the business class, they had entered a kind of magical kingdom spreading east from Silicon Valley; the top centile which a "new economy" decreed was worth the bottom 99; a place where, as in a successful IPO, a million gets you 100 million, where exponents replace multipliers.
It may be time to start radically increasing marginal tax rates above, say, Fisher's original $5 million. It may be time to start capping the management salaries in public companies. It may be time to stop permitting stock bonuses for performance spanning less than, say, four years. It may be time for transparency and shame. But the blockbuster logic of software and entrepreneurship and IPOs will, if anything, get stronger as the web becomes ever more pervasive. I am not sure the president can get us to fairness just by conjuring the values of Bedford Falls.
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I've never been one to value executive pay vs. stock price as a ratio. That's mostly because the market is completely out of the exec's control, and the "wisdom of crowds," while sometimes accurate, can also be completely faulty. (Quick example: The one genuine long-standing monopoly in the tech business, Intel, being consistently valued less than Microsoft. Dell could switch to all-linux tomorrow by swapping a few CDs on its assembly line. No one else in the world has the physical production capacity to replace Intel's chips for them. But I digress.)
Executive pay vs. net profit, on the other hand -- that is entirely within a CEO's sphere of action.
Every year, the Wall Street Journal does a survey of executive pay. And every year, while the Journal doesn't do the arithmetic so one has to do it on one's own, a CEO's salary is inversely proportional to EPS. The obvious examples for a long time were Bill Gates and Warren Buffett, who each took something on the order of $100K or $450K, if memory serves. Freeport-McMoran was another star -- huge profits, low CEO pay.
It's not unlike naming rights for sports venues. Just as a company so silly to invest money in naming rights almost certainly has other problems (3Com, Enron, Citi, Qualcomm, United, etc.), a company so silly to be paying a CEO an exorbitant sum has other problems as well.
March 19, 2009 12:12 PM | Reply | Permalink
These golden parachute severance packages are senseless. If there is an excellent chance the executive is going to fail and have to be gotten rid of at all costs why hire the executive in the first place, why pay the big bucks, and if the executive isn't willing to tie his economic fortunes to the fortunes of the company again why hire the executive. Of course, everyone doing the hiring has a golden parachute clause so a golden parachute clause demand can scarcely be laughed aside.
March 19, 2009 12:40 PM | Reply | Permalink
Fine Post Bernard.
Just an aside: In the movie, Mr Potter knows he has the money Uncle Billy misplaced. Geo. Baily's up against it because, without that cash the coming audit will ruin him, a great loss to the people of Bedford Falls.
At the end, the people of Bedford Falls come to the rescue, each citizen coming up with some cash to save George and his home finance organization.
But as for the original missing cash, well, Mr Potter keeps it.
(Hey, Capra seems to have been on to something!)
March 19, 2009 12:59 PM | Reply | Permalink
It's not that difficult to understand how pioneers of new technologies can detach themselves from mundane confines that guide and compress the rest of us - and how they can begin to think they're different, superior, and that they should be paid even more than Mick Jagger. They are, after all, scouting out new territories of reality; your friend Levitt talked about nothing less than synthesizing the brain... and then he and others made it happen.
It's more difficult to understand how engineers of our Dungeons and Dragons market scam could believe this. Way down deep, they must be well-acquainted with their inner shyster. And if they had one scrap of decency, they'd know they are paid criminally more than their bait-and-switch talents deserve.
The Galvins belonged to an earlier generation, not swept away by the flashing lights and purty colors of our pop-culture trough. We've convinced ourselves there is no "right" or "wrong". And because of that, we're occasionally broken on reality's merciless wheel. We may have invented the dimensions of morality, but stupidity is a universal constant - and eventually leads its sufferers to squashing.
March 19, 2009 1:18 PM | Reply | Permalink
What you're saying is just a larger version of economies of scale, but the funny thing is that the tech people have in significant part abandoned it. Even for Bill Gates, the cost of adding another customer is actually pretty substantial (there's a reason why "Microsoft Tech Support" has become a watchword), and the only reason he can keep it low is a de facto monopoly. For web-based businesses -- just do a search for "slashdotting" to see what happens when people think that additional customers can be added without cost.
The people who built the semiconductor revolution and the big engineering companies are on to a new model, where the cost of adding new customers is low not because you can reproduce the same damn thing a billion times as get everyone to pay for it, but because your employees can cheaply design and build customized stuff for each market niche they come across. It's not about big scales any more, it's about making smaller scales profitable (and often highly so, because the detailed market connection is what people pay for, not a cheap instantiation of what the market happens to want right now).
This, of course, is a notion that the Masters of the Universe ignored, because their whole business model was based on destroying information rather than propagating it. You can imagine someone with serious computing power using it to track every single mortgage in a securitised bundle and making a profit against other people doing the same thing. But instead these guys simply bribed one another to slap AAA ratings on the bundles and conned themselves and others into believing the ratings meant something. Huge amounts of information about the underlying sources of funds went in; a couple of bytes came out.
March 19, 2009 9:29 PM | Reply | Permalink