(Part one of a three-part series)
Main Street to Washington there are calls for control and enactment of new laws
and regulations to rein in executive compensation. While these calls for
control may seem correct and needed, they fall into the same category as the
"bailout the banks" cry made by omnipotent politicians, economists and
government leaders in 2008.
They believed they could solve the problem without understanding it. In 2008 both President Bush and Treasury Secretary Paulson foolishly stated: "We need to move quickly to solve the problem, we can find out the cause later." One cannot solve anything without a solid and clear understanding of the evolution of the problem. Trying to solve any problem without knowing its root cause is sheer folly. Problem solving of this type is not as simple as plugging a leak in an ocean liner. The problem of CEO compensation is recognized as a complex major problem, and some attribute the growing gap between the rich and poor and the economic recession to their greed. However almost two years after the crisis of 2008 we have an abundance of books and thousands of articles on the subject of the crisis and executive compensation and we still have not gotten any further than name calling. We read, "they are filled with hubris and greed" or they are "overconfident and narcissistic." Some even call them psychopaths, but beyond simplistic name calling we have yet to develop a deep understanding of why they need such wealth. Without any adequate knowledge of why these executives engage in wealth accumulation we now have politicians and pundits lined up to begin offering a plethora of solutions. What they are foolishly attempting is to cure the patient's symptom without diagnosing the nature of the ailment.
Why do they want, even feel that they need such outrageous compensation? We believe it is wise to understand the depth of the compensation problem on Wall Street and in corporate executive suites across America and the consequences associated with excessive wealth. We have virtually no research on the social and psychological impact of becoming a multimillionaire. We have no research on the impact of obtaining wealth on an executive's family or how the drive to obtain wealth contributes to the creation of a corporate culture of excess and privilege. We know that a significant portion of CEOs have been to business school or work with other executives who have gone and they know the profound consequences associated with a major gap between CEO compensation and employee wages, but they are compelled to get rich and, in the process, they have created an uncommitted, cynical and demoralized workforce. We will attempt to answer this question by examining the following: The problem of compensation transparency; the changing nature of the role and ideology of the executive; the growth of compensation consultants; becoming a multimillionaire, the short stay at the top; living in a top executive's world; the psychodynamics of wealth accumulation and its impact on mental health.
Sarbanes Oxley and the Problem of Transparency
Since 2002 the Sarbanes Oxley Act required that top executives of publicly traded corporations offer to the public details of the compensation received. The call for this form of transparency goes as far back as 1906 when President Charles W. Eliot of Harvard University delivered an address on "The Ethics of Managing Large Corporations." He claimed that such transparency will eliminate the practice of using "dummy" directors, of paying huge salaries to officers of corporations, and other evils. Others claimed that this form of transparency would put a stop to the secret and sometimes fraudulent accounting practices and outrageous executive compensation packages of top executives. But they were wrong. Transparency failed to accomplish what was expected; in fact, it's had just the opposite effect.
One particular view that has been proven wrong was put forth by Dietsch (2006) who maintained that to make public the compensation given to all corporate officers/executives would put sanctions on those executives who violated the morality of distributive justice. He argued that transparency would compel those who made enormous amounts of money to perceive the income gap as an unjust distribution of income and they would take action to reduce the gap. It did not happen. On the surface it seemed that CEOs and their executives did not care if the public knew their compensation and they did not seem to care if the public or their own employees were outraged. Dietsch (2006) addresses this problem and describes under what conditions transparency would not work. He says, "If ties of civil society are weak, then transparency [of salary] will not have an impact on distributive justice." What are these weak ties of a civil society? The weakening of ties may be similar to Emile Durkheim's "anomie," a condition where social and/or moral norms become unclear.
What we may have here is not an erosion of the moral ties that bind society but a breakdown in moral ties that bind a particular culture; in this case the culture of the executive constellation, a culture that is separate and distinct from not only the larger societal culture but in many instances even the culture of the corporation. It also may be that in the culture of this executive constellation, activities that bind are acts that go against the larger cultural and societal morality, but in their culture these acts are not considered immoral.
If this is the case then, from a psychodynamic perspective, how does this state of affairs evolve? We maintain that compensation transparency creates a culture where the need to obtain more becomes an over-riding need and that transparency has actually contributed to an increase in the compensation gap between CEOs and their employees. We begin with a simple question: If every year your income was published for all to see, would you want people to know you did rather well?
The Problem: Everyone Knows your Compensation
Freud once warned his fellow analysts that there were two subjects that "civilized people" will always treat "with the same inconsistency, prudishness, secrecy and hypocrisy -- sex and money." This may have been that true in the Victorian era when Freud was writing, but these are certainly not treated as similar subjects today, especially in American culture. People are more open about sex and their sex lives than they are about their money, but money still remains a guarded secret. One could easily imagine a couple of men or women at the sight of an attractive figure announcing "look at that; now that makes me hot." You may go to a cocktail party and hear people talk about how difficult it is to have time for sex or for the need of a sex vacation or even how many times a week they do it. But you will never hear people discuss how much they make, how much they have in the bank or the market, or how much they inherited from a relative. But this is not true for corporate CEOs and their executives. At work an employee may not know the salary of the guy in the next cubical but they all know what the big boss makes.
We know that compensation transparency allows all who associate with the CEO, friend and foe alike, to know their annual compensation. Consider this; MBA students were asked the following question: "You are asked to spend a weekend at a friend's summer house and everyone knows you lost your job and had to give up your condo but they do not know that you took a night job stacking shelves at Wal-Mart to make ends meet. Would you go?" Fifty percent of the respondents said they would not go. Thirty percent said they would not care and would go. Twenty percent said they may go but were uncertain. Why would the percentage either not going or perhaps going with trepidation be so high? We live in an environment where economic status is closely aligned with social status, we must keep up appearances, and if we fail we are in the painful position of losing social status and feeling embarrassed. Social mobility, while widely accepted in American culture, is typically seen as moving in one direction -- upward. To increase one's social and economic status (SES) is valued, accepted and is a critical component associated with the "American dream."
Transparency and Job Loss