How Excessive CEO Pay Undermines Enterprise Effectiveness and Efficiency in the 21st Century

Our most effective and efficient enterprises today understand, as University of Southern California Center for Effective organizations director Edward Lawler puts it, that all employees, not just the top brass, “must add significant value” to how their enterprises operate. Old-style “command-and-control” management techniques make no sense in Information Age marketplaces that regularly reward enterprises that customize products and services to what customers want.

Effective enterprises in today’s Information Age value the information that comes from employees who interact directly with consumers and understand what they want. Effective enterprises also value workers on the production line. These workers can help enterprises figure out how to evolve their production procedures to keep up with evolving consumer preferences.

No reputable business strategists here in the 21st century challenge these basic core precepts. Yet large numbers of enterprises today continue to rely on top-down management approaches that systematically discourage employees from gaining and sharing the information that could help their enterprises operate more effectively.

What’s preventing enterprises in America today from adopting and practicing the core precepts of modern enterprise effectiveness and efficiency? The most fundamental obstacle: corporate pay patterns that reward top corporate executives at outrageously higher levels than their employees.

How does over-the-top executive pay frustrate enterprise effectiveness and efficiency?

The higher the compensation at the enterprise summit, the more levels of bureaucracy fill the gap between top executives and employees. Enterprises that crave the best their employees have to offer but ignore gaping differentials in compensation between top and bottom do so at their peril.

Enterprises that tolerate these gaping differentials “succeed” not by empowering employees, but by building and wielding monopoly power. Instead of a competitive marketplace, economic power is increasingly concentrated in a small number of firms with the power to gouge consumers and squeeze suppliers. The dangers of this concentrated power have become even more vivid as giant corporations profiteer off the current inflation surge.

The strategies that enterprises with wide pay gaps employ to incentivize employees to do their best don’t work.

“Pay for performance” remains the classic corporate approach to getting more out of employees. Rewards, this approach holds, don’t need to be shared. They only need to be targeted — to those employees who do good work. Rewards for high-achievers, this management mindset insists, will encourage more employees to become high-achievers.

But individual rewards for performance discourage the collaboration and cooperation between employees so essential to Information Age enterprise effectiveness and efficiency.

Would rewarding groups of employees for their success help avoid this problem? Actual “gain-sharing” plans along this line typically go through the same depressing cycle. They launch with employees enthusiastically pinpointing the obvious inefficiencies they see every day. Earnings jump, and everyone shares in robust rewards. But workers can only fix obvious inefficiencies once. After this once, new productivity gains become steadily harder to realize. Incentive rewards start to shrivel.

Only small companies — enterprises that typically carry fewer levels of management than larger companies and smaller pay gaps between executives at the top and workers at the base — appear to be able to sustain performance-based “gain sharing.” Individual employees at smaller firms can see clearly that their efforts really do make an impact.

Lavish executive pay increases the pressure on enterprises to build ever larger corporate empires.

Execs with huge paychecks find themselves under constant pressure to justify their exalted status. Wall Street wants results — on a quarterly basis. So why should top execs even bother with the aggravations and uncertainties of trying to make their enterprises work more efficiently? Wall Street, after all, isn’t demanding that execs make their enterprises bigger and better. Just bigger will do.

Outsized compensation rewards for top executives stimulate costly acquisitions that result in more monopolistic marketplaces. American executives can win merger windfalls by gobbling up other enterprises. They can also win fortunes — “golden parachute” windfalls — by getting gobbled. They can wheel and deal themselves out of jobs and into fortunes, leaving behind the confusion endemic to hastily merged companies.

At some point, top executives run out of companies to snap up and swallow. Their grand enterprises, at this point, need to operate profitably enough to keep creditors and investors happy. But how? The “economies of scale” and “synergies” these execs had promised to justify their monopolizing behaviors quickly turn out to be mirages.

The executives find themselves trapped. They sit at the summit of huge unworkable, inefficient, top-down enterprises that bear absolutely no resemblance to the collaborative, high-performance enterprises modern societies need. From this summit, the executives cannot move their enterprises forward — toward real Information Age success — because that would mean unplugging the personal wealth-creation machines that their corporations have become.

Effective enterprises talk to customers, study customers, do everything they can to discern what they can do to make their customers’ lives easier and more pleasurable. This knowledge in hand, effective enterprises then endeavor to deliver on what consumers want — by providing products and services at a quality and cost that customers will find impossible to pass up. Effective enterprise, in other words, concentrates on customers, first, last, and always.

In today’s Corporate America, enterprises have trouble keeping that concentration. The executives of these enterprises have something more important on their mind, their own personal fortunes. We should not expect otherwise. Where we allow executive wealth to concentrate, without limit, executives will forever concentrate on maximizing that wealth. First, last, and always.

Huge pay differentials within enterprises create psychological environments that undermine enterprise effectiveness and efficiency.

We do our best work, psychologists tell us, when we enjoy what we are doing, when our motivation comes from within, from the pleasure we take from the work we are doing, not for any monetary reward. Indeed, monetary rewards can sometimes get in the way, make what we enjoy doing seem less pleasurable. Pay signals, at a most basic level, compulsion, that we are performing an activity not because we want to perform it, but because we must perform it, to earn enough to live.

Workers who worry the most about making enough to live never forget for an instant that they must work to live. They never stop feeling compelled to work. And the more that these workers feel pressured to work, the less pleasure they will take from the work we do. The less pleasure we take from our work, in turn, the less likely we are to do our work with any creativity or imagination.

No enterprise, of course, can turn work into play. But enterprises can, by helping employees feel more secure in their lives, take employee minds off the pressures that compel them to work. Enterprises that pay well and offer benefits that bring peace of mind can free employees to concentrate on the job at hand — and maybe even take some pleasure from it. But good pay and good benefits do not guarantee a workplace where employees take pleasure from their work. Inequality can poison any workplace.

Why, after all, would any sane person labor to make someone else rich? We enrich someone else with our labor — we let ourselves be exploited — only because we have no choice. We must do that labor because we must get that paycheck. So we labor on. We take a paycheck from our work, but no pleasure.

The starker the inequity in any workplace, the less pleasurable the work becomes. The less pleasurable the work, the less workers will likely contribute to enterprise success. The less workers contribute, the less effective the enterprise will be.

Not all employees, of course, must continue laboring in situations where they see and feel inequity. Many employees can afford to leave. Amazon has an annual employee turnover rate of about 150 percent. Enterprises pay a heavy price for such high turnover, in both dollars and time, everything from the severance that must be paid and the recruitment ads that must be placed to the staff time spent interviewing applicants and the training that must be conducted when new hires finally come on board. All these dollars and hours represent a drain on efficiency and effectiveness.

Generations ago, in the heyday of command-and-control, enterprises could survive high turnover. New employees just came in and did what they were told. But enterprises today need employees able and willing to do far more than what they are told to do. Modern enterprises need employees who can collaborate with colleagues in problem-solving, high-performance teams. But teams only perform well when the people on them trust in each other. Trust building takes time. Employees in high-turnover workplaces never get to take that time. Nor do they want to. Who in their right mind would pour their heart and soul into a company that doesn’t expect them to be around for the long haul?

Enterprises that devalue loyalty, that tolerate high turnover, will always be defective. Inequality will always make that devaluing inevitable.

Corporations that lavish multiple millions on their executives create great fortunes for their executives. They do not create great enterprises.

We human beings will spend the rest of our existence as a species working in enterprises. How well we do as humankind will depend, in no small part, on how effectively these enterprises function. If our enterprises learn how to truly tap the talents of everyone involved in them, if our enterprises efficiently and responsibly develop and deliver quality products and services that speak to deeply felt individual needs, then all our lives, as consumers and producers, will no doubt dramatically improve.

What sort of enterprises will help us reach these noble goals? No serious students of organizational effectiveness disagree on the basics. We need enterprises that hunger to know what their eventual customers or clients have to say. We need enterprises that unite employees behind a common vision, that empower employees with the tools, training, and decision-making authority they need to make creative contributions, that help employees cooperate and collaborate with each other. We need enterprises guided by leaders who respect their workers and are respected by them.

Inequality within the enterprise, the evidence suggests, subverts all these elements of enterprise success. The more rewards are allowed to concentrate at enterprise summits, the less likely that consumers will be valued, workers will be empowered, and executives themselves will be respected.

Effective enterprises simply cannot be bought or bribed or bullied into being. We expect money for our work. But we do not do our best work for money. So what’s the best way to pay people? Fortune magazine once put that question to CEO pay critic Alfie Kohn. His essential guidance: “Pay well, pay fairly, and then do everything you can to get money off people’s minds.”

Inequality, within the enterprise, keeps money on people’s minds. Deeply unequal enterprises have never been effective. They never will be.

Sam Pizzigati co-edits Inequality.org. His latest books include The Case for a Maximum Wage and The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970. Twitter: @Too_Much_Online.