April 12, 2006

Bloated pay drives bloated companies

This is shareholder proxy season, a time when executive compensation tallies are reported. Business journalists are busy writing about stratospheric rises in executive pay, and how they are often poorly linked to performance. What is sometimes missed in these accounts is the connection between bloated pay and bloated companies.

Bigger, not better, companies are a direct result of paying leaders for the wrong things. When the size of an executive’s pay is determined by how big the business is - instead of how well it is performing economically or meeting customer needs – unwise expansion is seldom far behind.

That is what is behind so many recent, unsound mergers.

Executive compensation used to be an incentive and reward for good strategy. But in many companies the tables have been turned, and the compensation system is what’s creating the strategy. And the strategy is usually about bigness.

Expanding top management pay is also seldom accompanied by equivalent percentage increases down the ranks. The gap between top strata pay and everyone else’s used to be measured in double digit multiples. Now seniors frequently earn hundreds or thousands of times more than the people they rely on to produce business results.

Gaps like this over-value top-down strategy and diminish the importance of execution.

They also erect big barriers to information flow and candid back-and-forth debate between those at the top and everyone else. Free-flowing information and dialogue are important. They are what fuel real growth.

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