CEO Pay Caps? You Bet!


By Adam Zak, Adam Zak Executive Search:

As a LeanThinker I am most unabashedly a free market advocate. Free trade, absolutely. Love those imported fresh Mexican tomatoes in my sandwich on a freezing January day. Open skies, no question. I look forward to when I can fly Singapore Air from Chicago to LAX, experiencing the same outrageously great service they provide on some of my international trips. And Brazilian, ethanol – bring it on over! Let's keep Illinois corn here in the Midwest where it belongs, fattening up that great-tasting Midwestern beef I'll be having for dinner tonight.

But Lean Leaders can not allow a purely free market to exist in executive compensation when certain CEOs of American companies are receiving taxpayer (spelled: MY) dollars via U.S. government welfare handouts!

LEAN is about performance. And rewards, any way you'd like to define them, should go to those who perform well. And those who do not deliver performance should also receive a strong message: NO rewards. President Barack Obama was quoted earlier this week in the New York Times:

“This is America,” Mr. Obama said on Wednesday. “We don't disparage wealth. We don't begrudge anybody for achieving success. And we believe that success should be rewarded. But what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers.”

So let's silently visualize the news headlines of the past few of months. Are you thinking of a company or two that has failed miserably in the market place? Even if you can't remember the CEO's name? We all know at least some of these folks (though we may not yet know ALL of them).

Now, think for a moment about some of the concepts which define LEAN performance-driven companies, and see if any of these all-star concrete-heads (automotive, financial services, transportation, etc.) looking for a hand-out could ever be connected with ANY one of these principles or practices.

Leadership? Value-added activity? Accountability? Employee engagement? Respect for people? High quality, fewer defects? Flow (well, I guess there was some cash out-flow in the form of toxic mortgages, but that doesn't count)? Customer value? Continuous or constant improvement? Lower cost? Going to Gemba (as in, knowing what the hell is going on in my business)? Corporate social responsibility? Transparency? And how about just good old-fashioned plain honesty?

See many (LEAN) connections? Neither did I. Many of our “modern” executive compensation systems are built around rewards and incentives that simply don't do what they were supposed to do. That in itself is a performance issue, and a topic for another day. I'm sure we could apply loads of LEAN improvement strategies and practices in the compensation arena. But how about doing something right now?

Solutions? Well, I'm not an economist and I'm not a political activist, but I've sure met a lot of top-performing executives who've gotten LEAN religion, then transformed their organizations and their corporate cultures. And then delivered performance, and been well-rewarded for it.

So in the spirit of LEAN I offer a simple suggestion which can be implemented right now: Every company receiving assistance in the form of our tax dollars MUST send its Chairman, CEO, CFO and all business unit (division, subsidiary, etc.) leaders to an intensive (say 3-5 days, perhaps 10 for the CFO) hands-on LEAN EXECUTIVE training.

I've got a short list of appropriate Senseis in case anyone's interested.

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  1. Joe W says

    Please stop writing Lean in all caps. It’s distracting.

    I’m not sure I buy that there are a lot of lean executives living all the principles that you have outlined. I believe there are a lot of people embracing the cost cutting tools, but not the entirety of the system.

    Also, you can send every one of these folks to visit the ghost of Taiichi Ohno and it still won’t help the current situation. One of the first principles of the Toyota Way is focusing on the long term even at the expense of the short term. So many of these businesses can’t do that because they don’t even know if they’ll be around for a long term.

  2. Mark Graban says

    Ah, short-term vs long-term thinking.

    On that note, the Congressional Budget Office (non-partisan) says the Obama stimulus plan is good for 2009 and 2010 but actually hurts the economy over the next 10 years because of all the debt.


  3. Andy Wagner says

    I'm all for paying CEOs what they're worth. If they're worth millions, pay 'em millions. I'd rather have a great high-priced CEO in charge of Citi-Bank right now than an incompetent stooge. What *frosts* me these days, to use my mother's phrase, is that most of these companies have been led into the dumpster by incompetent stooges and their boards of directors haven't taken the logical action in response!
    Rick Wagoner, the Nero of the automotive world, has watched GM shrivel for 7 years without a pay cut.
    Bob Nardelli was passed over by Jack Welch, ran Home Depot into the ground, and hasn't shown the slightest creativity or even initiative at Chrysler. (Cerberus hired Jim Press *before* Nardelli).
    Alan Mulally at Ford, who didn't ask for Federal money (yet), at least has a credible claim to his money. In his first quarter Ford's warranty costs came down by $15 million, less than his first year income. But keep in mind, Bill Ford, scion of the owning family, was the previous CEO and Bill had the wisdom to *fire himself* in order to save the company.
    GM & Chrysler sales are down 50% this month. Ford down 40%, Toyota and Honda down 30%.
    Speaks for itself.

  4. Mark Graban says

    Wagoner did cut his pay a few years back and then restored some of it.

    I think the huge paychecks should be reserved for people who create something (Gates, Jobs, Bezos… even Michael Dell). Professional managers shouldn’t earn the huge paychecks that entrepreneurs merit, but that’s just me.

  5. Andy Wagner says

    I guess I believe less and less in professional managers. Companies that make products should have product people heading them up. I don’t care if it’s a knuckle-dragging manufacturing guy or an engineering guy, or even a marketing guy who understands the customer.
    I hate to paint with such broad strokes, but I don’t trust finance guys anymore. Accountants shouldn’t run product companies.

  6. Mark Graban says

    Well Andy, I no longer trust lawyers and politicians to run our country either!

  7. Andy Wagner says

    I can’t argue with that!

  8. Anonymous says

    The pay caps got taken out of the final stimulus bill, see where I commented on Mark’s post today about the stimulus bill process.

  9. Agi says

    Yes, there absolutely should be caps now, but stockholders should demand them as well.

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