What about everyone else?

 

I was recently talking to a journalist about how much better executive compensation and corporate governance is than it was 10-12 years ago. We tend to forget how far we have come. Executive pay actually moves up and down with performance. Compensation committees really are independent, advised by independent consultants. Many of the most excessive perks are becoming relics of the past. While it is too early to declare victory, we have come a long way.

The journalist paused, acknowledged the truth in what I had said and asked a very good question: “How do you explain that to the typical worker whose pay has not increased in real terms for decades?”

I have wondered for some time about why so many people continue to be so upset about executive compensation and corporate governance when we have made so much positive progress. It occurs to me that the problem may not be that executives are paid too much, but that employees are paid too little.

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When I say that employees are paid too little, I don't mean that we should just give everyone a huge raise. I mean that we should give employees the opportunity to earn more, perhaps a lot more.
There was a time, back in the 1980s and early '90s, when companies spent a lot of effort and creativity developing “gainsharing” plans and other creative incentives designed to foster a profitable win-win for employees and company. These plans, many of which are still in place, gave employees greater input into improving a manufacturing process, and shared a portion of the improved performance, or “gain,” with the employees. These employee incentive plans required thoughtful design and careful administration, but to a very large extent they worked.

So, what happened?

The answer is and was stock options. In the early 1990s, companies became increasingly enamored with stock options for all or most employees. Options had no accounting expense, so they appeared free to the company. And we were in a strong and long bull market. Everyone made money. Employees were happy, and we didn't have to go to all the trouble of designing plans that actually measured what employees did, nor educate them in how to improve productivity. Through the magic of stock options, all employees would automatically become shareholder value maximizers and reap the benefits of their collective brilliance from the market. Well, that ruse worked until the market crashed in 2001.

Then, a few years later, an accounting expense was introduced for stock options. Not surprisingly, most of the companies that had touted the amazing benefits of granting options to all employees decided that only executives could really appreciate their value. And companies that did continue to grant options broadly often found that the options did not deliver much value in a market that has been mostly flat for over a decade.
Where does this leave employees? With limited opportunity to collectively improve productivity and increase their pay and standard of living.

So, what do we do about it?

It occurs to me that we spend an enormous amount of time, talent, ingenuity and resources determining how to pay the top 10-20 people. What if we used some of that talent and creativity to design incentive programs for all employees? What if the board focused a portion of its time on making sure the company was getting the best out of all employees and giving them the opportunity to contribute and share in the gains?

This is not just idle speculation. Here is what two sample companies are doing:

• Restaurant Chain: Creating a store profit improvement plan, where all store employees are educated in the basics of store profitability, participate in efforts to bring in customers and improve revenue, and share in monthly gains in
operating profit.
• Retailer: Employees in each store select which products to carry (from an approved list), how much to stock, how to display them, and make local market advertising decisions as well as staffing and hiring decisions. Employees are educated in store financial statements and share in store profits. This allows a large retail organization to have “eyes on the street” and adapt quickly to local market conditions and customer preferences — while paying employees significantly more.

It is not just senior executives who have natural business abilities, entrepreneurial spirit, and ability to think and make productive decisions. We have an opportunity to use the powerful tools of well designed incentives to unlock the potential of our workforces and share in the wealth they help create.            â– 

The author can be contacted at ddelves@delvesgroup.com.

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