Topic: Management Improvement

Via Christian Sarkar, Too Many Turkeys, The Economist:

Christian Sarkar asks, can we outsource the CEO to a low-cost country? That is exactly what will happen at the ludicrous levels pay has risen to. If the United States were to lock into a payscale that is unsustainable globally US companies will be no be able to compete. My guess is plenty of people in the USA will be glad to compete against the brooks brothers bureaucrats but if not, others will.

The excesses are so great now they will either force companies to:

1. take huge risks to justify such pay and then go bankrupt when such risks fail (and some will succeed making it appear, to some, that the pay was deserved rather than just the random chance of taking a large risk and getting lucky).
2. make it impossible to compete with companies that don’t allow such excesses and slowly go out of business to those companies that don’t act so irresponsibly
3. hope that competitors adopt your bad practice of excessive pay (this does have potential as most people are corrupted by power, even across cultural boundaries). However, my expectation is the competitive forces of capitalism going forward are going to make such a hope unrealistic. People will see the opportunity provided by such poor management and compete with them.

As long as the pay packages were merely large, and didn’t effect the ability of a company to prosper that could continue (slicing up the benefits between the stakeholders is not an exact science). The excesses recently have become so obscene as to become unsustainable.

Companies will not be able to compete if they allocate huge portions of the benefits provided by the operations of the company to the few sitting on top of the bureaucracy. On the other hand large pay for Directors alternatively is sustainable as it hardly impacts the overall results of the company directly. The poor performance of boards that may well be caused by directors feeling more obligated to the top bureaucrats for their large pay is a different matter.

Companies that provide huge benefits to those few at the expense of investors, the rest of the employees, customers, suppliers… will find the other stakeholders find it better to go elsewhere and interact with those companies that are more equitable.

Because those that are taking excess portions of the benefits of corporations have power to determine whether those companies stop providing excessive benefits to themselves I am sure many will slowly go out of business all the while blaming other factors. With the current system the most likely force to stop such abuse are those representing the investors.

Those taking excessive gains for themselves have learned how to block the interests of the owners fairly effectively, turning boards into pawns of the top bureaucrats instead of the owners. Those bureaucrats have advantages in the battle to allocate the gains fairly but I believe they are overplaying that advantage and over time the tide will change. But time will tell what actually happens.

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• The Economist on Drucker
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