Deserved? Senior Executive Pay Today.

In 2000, Jack Welch earnt more than $150 million during his last year as CEO of GE.  His firm had delivered shareholder returns averaging more than 26% year-on -year for his final 6 years in the role.  GE’s performance placed it in the top 20% of the S&P 500.

Jeff Immelt is Welch’s successor.  In the first 6 years of his reign, the returns to GE shareholders have averaged 0.03%, placing it in the bottom 25% of the S&P 500.  As best as I can tell, Immelt’s remuneration, which includes generous stock options, is in the range of $15 to $25 million a year.

This brings us to the elephant in the room.  Welch has long been called one of the world’s great business leaders.  Nonetheless, he spent his early years as CEO, the “neutron Jack” era, blowing the GE structure to pieces before beginning its recreation.

Writer Rob Walker noted in 2001 that our reliance on shareholder returns as the indicator of leadership success may be highly misleading, since investor confidence across the board significantly blew out US price-to-earnings ratios during the 1990s, adding billions to company values without parallel improvements in the underlying profit-creation capacities of these firms.  Further, a reading of GE’s history over the last century reveals a consistent pattern of excellent returns from one decade to the next.  You can find Rob Walker’s excellent article at http://robwalker.net/html_docs/welch.html  In his own books, Welch is also generous in his praise for his predecessor, Reg Jones, further evidence of the foolishness of the view that, “In the beginning was the Word, and the Word was Jack….”

In Australia, the Macquarie Bank is being increasingly criticised for its approach to executive pay.  The Mac Bank model relies on the purchase of infrastructure assets such as airports and toll roads.  The fees paid by users of these facilities are fed into profit streams in the normal manner, however the infrastructure is sold on to investors via other Mac Bank funds.  Their contributions pay management fees to Mac Bank, thus keeping the bank’s executives in the financial clover.  In my most recent textbook, I noted that the CEO of Mac Bank had received more than $21 million in remuneration in 2005-2006, while the company’s overall salary bill for its 5,700 employees resulted in mean wage of $186,000 per employee (including the assistants and office juniors and mail boys – that’s mean but not so mean!).

Here is my bottom line.  Capitalism depends on the generosity of its stakeholders for its continued existence.  Capitalism’s stakeholders include the punters with mortgages and weekly rent bills who work hard for $15 or $18 or $25 an hour.  Their ability to buy houses and pay rent has rarely been lower than it is today.  Why?  Easy credit, the world tells us.  Why easy credit?  Because bankers being paid ridiculously high amounts of money to return ever-increasing levels of profit invented various houses of cards that were denoted as “derivatives”, “hedge funds”, “securitisation mechanisms”, and “naked short selling”.

The globe’s scarcest resource right now is not credit.  It is virtue. 

Virtuous behaviour is behaviour with a conscience.  It is behaviour that transends today’s short-termism and instead incorporates those values that are forever important and forever relevant….generosity of spirit, generosity of wealth, generosity of both heart and mind.  In summary, generosity within the disciplines of humility and unselfishness.

Truly great leaders, in every industry, possess this generosity in spades.  Jim Collins called them “Level 5 Leaders”, but wondered if there was any means of developing such leaders since those he studied had forged their humility and strong will in the crucibles of personal crises or while at war.

Real leadership of this kind can indeed be developed.  The stories of many of the world’s great comebacks from failure and disappointment (George Foreman, Dion di Mucci, Dave Dravecki) begin with a moment in which we see ourselves for the narcissists we tend to be.   We may need a movement of the spirit, however, to affect real personal change.

While self-confidence is an absolute necessity for corporate success and indeed success, in the world’s terms, in most endeavours, unless this self-confidence is couched in the cradle of humility, it all too easily becomes hubris.

Hubris is the enemy of virtue.  Without virtuous behaviours, however, we are all shot ducks.

It is virtue we need right now, a new “reformation of manners”, to recall a similar movement from English history in the 17th and 18th centuries.

Reformations always begin with individuals.  That’s you, and that’s me.  Virtuous behaviour begins with us.  It’s time to start with ourselves, becoming the exemplar that spreads.