Wanted: Better ways to reward CEOs
07/01/2007
Rising productivity can create prosperity for corporations and individuals. The impact of new technology in boosting productivity was a major contributor to the lengthy economic upturn of the 1990s, according to Alan Greenspan when he was Fed Chairman. But toward the end of the decade, investors got carried away with the explosive potential of the Internet, leading to the dot.com boom-bust fiasco.
In recent times, productivity growth has tapered off again, and, not surprisingly, the economy has turned sluggish this year. In the tight times following the dot.com decline, US corporations responded vigorously-closing plants, laying off millions of workers, and moving operations to lower-cost off-shore locations. In many companies, employees took on the tasks once handled by two or three. As the world economy rebounded, the streamlining paid off with record profits.
What did American corporations choose to do with the huge hoards of cash that piled up? Upgrade their technology and streamline operations using new technologies? A few companies did, but not the majority. Many CEOs instead used excess cash to buy back stock, pay dividends, or make acquisitions. While there was a mild increase in capital spending over the 2005-2006 period, it turned to a sharp decline earlier this year.
Consumers have been driving the economy upward by taking on unprecedented levels of debt, often by refinancing home mortgages. The semiconductor industry benefited as consumers bought feature-loaded cell phones, flat-screen TVs, personal digital assistants, game consoles, iPods, and laptop computers. Economists expected that a new, strong business investment cycle would by now be a major economic driver in the US as businesses invested in upgrading their technology. That should have resulted in another round of rising productivity growth. So far it hasn’t.
Hiring in the recent upturn has also been sluggish, and wages have not gone up as they have in similar periods of the past. Evidently many employees kept doing multiple jobs, but without much in the way of pay increases. Faster networks with smart storage, providing enhanced data mining and analytical tools, could offer more powerful capabilities for efficiently expanding business worldwide. But the sharp decline in capital spending in recent months suggests that most CEOs are choosing not to upgrade.
There have been many reasons given for why business capital spending has not picked up as in past cycles. The most recent explanation is caution due to the uncertainty created by the housing slowdown and the impact of higher gas prices on future consumer spending. But these factors have been there for over a year, and only recently have there been signs of a slowdown. After the dot.com bust, executives were said to be disappointed because costly information systems had not yielded the promised results. But in the past few years there have been tremendous gains in efficiencies, cost savings, and the speed of doing business based on advances such as Web and wireless services.
There may be a more subtle reason for US CEOs being less willing to spend corporate capital on more productivity-enhancing technology. Corporations have found ways to disguise huge CEO pay packages, particularly by much greater use of stock options. Stock buy-backs, and even higher dividends, can immediately boost stock prices, giving a much quicker payoff to top executives than any investment in new technology. Could CEOs be making decisions good for their own bank accounts, but not as favorable for the long-term strength of their companies? It is a possibility. Note that while the salaries of employees have been rising slowly, average CEO pay in the US rose to 431 times that of a production worker in 2004-up from 301× in 2003-and is continuing to escalate.
Excessive CEO pay is becoming a problem even Wall Street now recognizes. Cozy boards with compensation committees chosen by the CEO have often richly rewarded executives whose organizations performed poorly. If American companies are run by individuals more interested in getting rich quick than in building the strength of their organizations, it does not bode well for the future competitiveness of US companies.
Running a major corporation is an increasingly tough, complex job as global competition increases and markets fan all over the globe. Good CEOs deserve to be paid well. But formulas need to be found that spread some of the reward into the future, as wise investments pay off in subsequent years. Then, as our industry comes up with steadily improved technologies, there will be incentives for corporate decision-makers to take full advantage of them.
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Bob Haavind
Editorial Director