Wednesday, June 30, 2010

The Economist gets it wrong on CEO pay

The Economist attacks Japan in a recent article, "Spartan Salarymen", for the lower pay managers of companies receive relative to their counterparts in the U.S. and Europe. This is yet another example of the CEO-Media Complex, a collusion between big business executives and the media (newspapers, magazines, journalists, etc) who work together to elevate pay higher and higher for executives, championing CEO's as the reason why companies do well, while neglecting the real reason companies perform - the multiple actions of the men and women in the ordinary jobs who show up day after day and execute their roles with precision. They are the true heroes and drivers of performance, and they should be compensated as such. It seems the Japanese have their priorities in place as a nation, culture, and a business environment.

The article sounds like it was written by one of those "compensation consultants" wonderfully described by Harvard Business School Professors Jay Lorsch and Rakesh Khurana in their excellent article, The Pay Problem, in Harvard Magazine.

I was cheered to see that the large majority of reader comments on the Economist article believed that the Economist had got it wrong. Clearly, CEO's and other top managers in the US and Europe are overpaid. As Professors Lorsch and Khurana point out, compensation consultants who collude with CEO's to convince disinterested Boards and Compensation Committee's are only part of the problem. Executive pay in the West continues to rise in the West "not so much as a driver of improved performance, but as a consequence of improving performance and an accompanying rise in equity values. ... Incentives have impact on behavior only when the recipients can see a direct link from their actions to the results achieved and the rewards they will receive. ... In most companies, multiple forces and the joint efforts of many individuals cause the results achieved."

I hope the Economist writer will do his homework in the future before writing such ridiculous propaganda promoting the CEO-Media Complex.