When is executive compensation enough? When do executive salaries and bonuses actually hurt the best of interests of a company?
Given the history of compensation over the several decades, the answer from the executive suite would of course be “Never!”
But another view is emerging, as highlighted by Vivek Wadhwa in a viewpoint column last week for Bloomberg Businessweek, “How to Fix Oversize Executive Compensation.”
Wadhwa is a visiting scholar at University of California-Berkeley, senior research associate at Harvard Law School, and director of research at the Center for Entrepreneurship and Research Commercialization at Duke University.
He notes that over the past 30 years the earnings of American workers has not kept pace with U.S. productivity growth. Meanwhile the earnings of corporate executives exploded.
Those who defend the explosion in executive compensation—and you know who you are—argue that executives deserve their princely salaries, stock options and bonuses because they make the most significant contributions to their companies’ success. Recent economic and financial history has shaken that idea, and now there’s evidence that the justification was hot air.
Wadhwa writes about a study from the National Bureau of Economic Research, a part of its Shared Capitalism Research Project, showing that “distributing rewards across the corporation—sharing them with workers—is the most efficient way of making businesses more successful. Motivated employees are more productive and spur innovation in products and processes.”
The Shared Capitalism Project has been around for about 10 years. According to Wadhwa, Harvard economist Richard Freeman, Rutgers sociologist Joseph Blasi, and Rutgers economist Douglas Kruse analyzed data from surveys of 41,206 employees at 323 work sites. They found that nearly half the employees of American corporations participate in some form of profit-sharing or stock-option plans, or what they call “shared capitalism.” The researchers found that shared capitalism improves company performance, improves worker well-being and complements other policies.
Incentives are an integral and necessary part of the Vested Outsourcing business model. It’s impossible to have a shared vision and collaborative framework without loyalty, trust and reward for hard work, innovation and participation in decision-making.
“It is no surprise that when workers share in the rewards, they are more likely to be committed to a company’s success,” Wadhwa says. “You would also expect workers to be happier when they have more responsibility and less supervision, as the researchers found.”
A great example of this collaborative, shared reward approach occurred with the closure and cleanup of the contaminated nuclear waste site at Rocky Flats, where plutonium triggers were manufactured for nearly 50 years. In an early and highly successful example of incentive-driven and performance-based contracting with the Department of Energy, CH2M Hill earned three times the average margins of usual DOE deals—all based on bonus money—by exceeding performance and reducing costs to DOE. CH2M Hill gave 20 percent of the incentive bonuses directly to the workforce. The result was that CH2M Hill saved the DOE $30 billion and cleaned up Rocky Flats some 60 years ahead of the original cleanup schedule estimate.
Wadhwa says there is zero evidence that awarding grandiose executive incentives have caused the U.S. economy to perform better. “Instead, as we have seen with the demise of Enron and other companies—and the near collapse of our economic system—enormous payouts encourage risky behavior and lead managers to game the system.”
Freeman, Blasi, and Kruse suggest that tweaking the tax code can stop that type of game: allow executives to deduct incentive pay as a cost of business only if they offer the same incentive program to all workers.
“In other words, don’t give tax breaks to companies that provide stock options and bonuses to only a few executives. This would correct a major loophole in the tax system with which corporate executives have been enriching themselves at the expense of their stockholders and taxpayers.”
This is not an extreme idea; the same approach applies to pension and health-care plans, which are deductible as a cost of business only when they cover every employee.
So yes close that loophole, but more importantly discover the benefits of sharing value, rewards and innovation by fostering a Vested, “What’s in it for We” mind-set throughout the organization.