How much money should a senior executive or owner of a business make, is a question that seems to keep surfacing, so let’s see if we can make sense of it. First of all, I think it is an important question, certainly central to the debate about income inequality, income taxes, a potential wealth tax, and the battle between advocates for free-market capitalism vs. proponents for socialism. From the perspective of future economic growth and wealth creation, it may be the most important question to answer.
One statistic that many are quick to criticize is the ratio of compensation between senior executives and rank-and-file employees. That ratio has been climbing for decades and is now nearly 400-to-1, according to a study done by the Economic Policy Institute of the 350 largest firms. At the same time, no one seems to object to the fact that the ratio is even more distorted between the highest paid athletes and the journeymen, in every major sport. In virtually every industry or profession, senior executives, who are usually owners, receive total compensation far above what is earned by average employees. Is this simply the laws of economics or is it a moral issue?
Someone in every organization is responsible for determining compensation. Unless that person has embraced servant leadership, there is a high potential for excessively disproportionate compensation favoring senior executives. In essence, greed becomes a powerful driving force. If you believe that a 400-to-1 ratio is unjustifiable, which I do in every case, then this is a moral issue. Again, when greed drives decision-making, it becomes a moral issue.
On that note, the disconnection, polarization, and lack of community that plagues parts of our country is made worse by greed, which affects everyone in some way, not just uber rich corporate executives. Perhaps we might all live by the famous quote by John Wesley – “Earn all you can, save all you can, and give all you can.”
When you work for an organization, and you discover that another employee is making more than you are, you have several options. One, you can work harder, network a little more proactively, and try to earn a pay raise. Two, you can find another job inside or outside the organization. Three, you can put your head down, do your job, and not be concerned about it. Four, you can work to undermine the person you feel is overpaid relative to you. All these options are exercised every day in corporate America, and there is a moral component to each option.
Two management concepts can alleviate income inequality…
First, under a Servant Leadership model, the ratio of total compensation for senior executives would never even approach 400-to-1. I knew the president of a company of around 20 people and the ratio at that firm was less than 3-to-1 in most years. This more equitable sharing-of-the-wealth was a linchpin of the firm’s corporate culture. It helped create a loyal and dedicated work environment. Could the president have paid himself more? Absolutely, but then the culture of the firm would have been very different.
The second concept is stewardship. A steward operates as a manager for the benefit of the entire organization. He can technically be an owner as well, but he balances the financial needs of the owners with a responsibility to be fair and even generous to non-owners. Compensation structures would undoubtedly be more equitable if senior executives and business owners viewed themselves as stewards instead of owners of the wealth and income produced by the organization. A steward would never be comfortable with a 400-to-1 ratio.
Most importantly, the culture that is created by the twin pillars of servant leadership and stewardship is incredibly powerful and productive over the long run.
Do large firms today even have a culture?…
If so, what is it, and how is it impacted by this Executive-to-employee pay ratio? Difficult questions to answer. In my 40-year career, I worked for several very large financial institutions. It’s hard for me to define what the culture was at any of them. There were outstanding people at each organization, as well as people much less so. I’m not sure the leaders even thought about whether their corporate culture was positive or counterproductive. Why do I say that? Because you can’t create positive culture without building trusting relationships, and in my experience, large organizations, in general, don’t do that very well. Leaders at large organizations typically become isolated, insular, defensive, and even a bit paranoid. Their primary thought process is focused on keeping power, which is understandable in situations with compensation ratios of 400-to-1.
Government need not play any role in the management transition to servant leadership and stewardship. The corruption between business and government elites would only be exacerbated by an attempt to determine relative compensation ratios or limit executive compensation, through legislation or executive fiat. As history has shown repeatedly, it is impossible to legislate morality.
So, is there any hope?… I believe it was Coach Wooden who said, “Discipline yourself and others won’t need to.” It is possible that a true Servant Leader acting as a Steward could set an unselfish standard, inspiring other executives to do the same thing. It may seem far-fetched, and probably is, but it is still possible.
In a previous addition, I called for the best of the best to commit to serving in public office at the national level. That simply isn’t happening in politics today. So, I am also calling for all S&P 500 CEOs to lower the ratio to something reasonable, perhaps 20-to-1. What would that do to a firm’s corporate culture? Would this act of unselfishness be inspirational to other employees? What would that do to our country’s trust in corporate America more broadly? I’ve never known anyone who was inspired by selfishness or greed. Have you?