YARDSTICK TO MEASURE CEO'S SUCCESS AND PAY
Farid A. Khavari, Ph.D. Economist
Usually corporate America is used to measuring the success of their CEOs by the amount they maximize profits of their respective corporation. Since there are no other yardsticks to quantify success, it can easily lead CEOs to become greedy and shortsighted, concentrating on using every possible ways and means for that success. This often leads to unethical, abusive and criminal methods to maximize profit, interested only in getting their cut with very little regard for the future of employees of those companies, and the final outcome for the economy of involved nations.
It's no secret that since the introduction of "globalization" it has eased the way and helped CEOs a great deal to maximize profits within short period of time without need to use too much brains or sweats. All CEOs need was to outsource products to low-labor cost nations, and if needed, also technology along with the order to manufacture goods at low cost, importing them, and turning around selling them with tremendously higher prices relative to the manufactured cost, yet at a relatively lower price than it would have cost to manufacture them in the United States. However, as the CEOs in the manufacturing sectors of the economy enjoyed the fruits and taste of unusually and unjustifiably high incomes as results of rapid maximization of profits, the CEOs of other sectors, predominantly in the financial, healthcare and legal industries, were encouraged to follow suit, increasing their revenues through maximizing their profits.
Needless to say, the latter groups were not shy to prove that they were no less than former groups when it came to taking greed to the next level, filling their pockets by outperforming the former group. A few of their practices can be mentioned as follows:
- The financial institutions went to the extreme by easing mortgages with using subprime, and finding every conceivable excuse to charge fees of all kinds;
- The healthcare industry had it much easier; the $2.5 trillion industry says it all. If the CEOs of the financial institutions could maximize profits by charging fees, the healthcare industry had additional rich sources--Medicare! CEOs reached their goals by exploiting and/or robbing Medicare through overcharging or charges for which no services were provided.
- Since lawsuits are an integral part of doing business in the U.S., lawyers did not fall behind; they could reach their goals through freedom and lack of control of billing for the hours they worked on a case, and consequently billed for hours that could not have existed in periods of which they claimed to have worked on those cases!
Hence, greed kept growing to an irresponsible height, resulting in the economic woes we are suffering from currently, which now demands serious attention and ways to resolve them!
Of course, we continually hear that CEOs deserve all kinds of preferred compensation for their financial performance! After all, profits are what make a corporation stand or fall! There is no debate that all companies must make profits. It is needed simply for companies to continue to exist. However, there are other factors involved in business, which is more important than the short-term profit maximizing goal; it is the long-term existence of the companies in a vibrant and healthy economy. Therefore, the yardstick with which one should measure the amount of compensation for CEOs in whichever form it might be (salary, bonuses, stock options, etc.), should be based on a series of factors from which the "maximization of profits" result! This step is necessary in order to prevent possible short- or long-term negative consequences for the company, their employees, other people involved in the process, directly or indirectly, the economy and the environment as a whole in the long-run! In clear words, it means that the profit maximizing goal should not be achieved with short-term goals in mind. By neglecting all other factors that could lead to long-term prosperity of a vibrant company; it should be based on a series of factors, some of which are as follows:
1) Before jobs could be outsourced in order to cut the cost and increase profit, the CEO should make sure that one of these are met for the person whose job is at issue: a) Either he has gotten a replacement job, or b) He is financially set for his life, or c) There is some kind of guarantee to have enough financial savings/support in order to carry him until a new job of the same level is found for him. Otherwise, the profit maximization has reached through "social cost." A performance like this is more than a failure, and failure should be neither promoted nor rewarded. Examples of this can be found in car manufacturing companies, banks and insurance companies.
2) The outsourcing of jobs must not create "social cost" for the economy through loss of jobs and contributing to increased unemployment and unemployment compensation for the unemployed whose jobs have been outsourced.
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