Last year, a number of corporate chieftains grabbed the headlines with their demonstrations of greed. Enron, Arthur Andersen, WorldCom… the media was quick to pounce on corporations and their leaders who abused their positions. Of course, the media is a business in itself. It needs to win and sustain an audience, and oftentimes media outlets will try to grab people’s attention by exploiting facts and manipulating numbers. Things become sensational even when they are not. Granted, there have been numerous cases of corporate excess and greed. But these cases represent exceptions and not the rule.
This intense focus on a few corporate misdeeds has had the effect of painting all CEOs with the same brush. When we read of an executive’s salary or retirement package, we’re quick to suspect that those earnings are ill-gotten, or at least excessive. We know that the former is the product of media exaggeration, but what about the latter? Are CEOs too well paid?
The numbers behind CEO salaries
A recent survey of America’s top 50 CEOs showed that their pay rose 5% to a whopping average annual salary of $10.7 million. That’s a lot of dough, without question, and some of the CEOs are undoubtedly drastically overpaid.
But if one takes into account just how much the top 50 companies earn, it puts matters into perspective. How well did the Fortune 50 do? Well, on average, they generated $4.58 billion in profits from $64.2 billion in revenue — not too shabby. That means that, on average, a top 50 CEO made 0.016% of the revenue his company generated, or 0.23% of their profits. That’s not too much, now is it?
Mind you, this CEO data is a bit skewed. For example, the survey reports that Stanley O’Neal was near the top of the list, having made $32 million in 2004. But O’Neal’s company, Merrill Lynch, is not in the Fortune 50, coming in instead at number 58. Merrill generated $3.99 billion in profits on revenue, which means that Mr. O’Neal’s salary was equal to 0.11% of revenues… start the witch hunt!
Yet even when taking Mr. O’Neal’s income into account, CEO pay is not entirely out of whack. Companies and CEOs both tend to make a lot of money, but they also employ a lot of people and pay a lot in taxes. Do they go out of their way to lay people off so they can make more profits? Sure, they do. Do they go out of their way to pay less taxes? You’d better believe it. Yet this does not make large corporations any different from smaller businesses or individuals, all of whom strive to save money and pay less in taxes. The fact that their profiteering efforts take place on such a grander scale, however, make the corporations seem somehow more guilty.
How do executive salaries compare to those of pro athletes?
Salaries in pro sports
Furthermore, many regular Joes like you and I think of CEOs in the same light that we do athletes. And athletes do not enjoy a sterling public image when it comes to their earnings — particularly in a year where we see a major sports league like the NHL locked out over a salary dispute.
When we complain about the ridiculous wages that athletes make, we often forget what they do to earn them. Playing an NFL game can be the physical equivalent of 20 car accidents, and a hockey player is always a concussion away from early retirement. Considering the high level of competition, the risk involved and the relatively short career spans, it could be argued that athletes make a reasonable amount.
Another thing to keep in mind is that the athletes are the product. If they did not get their fair share of the spoils, then the owners would get too large a cut. Given this, I can understand why players will sometimes have gripes — but they are not always legitimate ones. The problem behind the current NHL lockout, for example, is that the players were getting an obscene percentage of the league’s total revenues — nearly 75%! Even Donald “You’re fired, I’m bankrupt” Trump would tell you that that ain’t no way to run a business.
Relative vs. absolute
So, even though many of us are quick to lump athletes and executives in the same pile, a closer examination of the tale of the tape reveals a drastic difference. Athletes may sometimes be overpaid in relative terms, but executives are usually overpaid in absolute terms.
Much of the scrutiny over both athletes and executives stems from the fact that human beings tend to be jealous. It isn’t right, but it is what it is. Very few people can overcome these feelings of envy and take a positive perspective on matters. This is why corporate chieftains and corporations in general have such large targets on their backs. And there’s no getting around this — as publicly traded companies, they have to air their dirty laundry in public.
I was given a personal window into corporate profits this past week. I am a shareholder of numerous companies. I like how that sounds, but the truth of the matter is that I own very limited shares in numerous companies — on paper, you would think I run a massive hedge fund, when in reality, I’m dreaming.
One of my holdings is Wipro, an Indian company that has benefited from American corporations’ current craze to sell out their workforce by outsourcing labor. Last year, before outsourcing became a household name, I bought a whopping 100 shares of Wipro. Sitting on a 25% gain, I was close to selling the shares last month. It’s a good thing I waited. Last week, as a shareholder, I got a letter from the company outlining, in painful detail, what Chairman and Managing Director Azim Premji was receiving in compensation. I am not Indian and have never been to India, but apparently Mr. Premji is India’s answer to Bill Gates. In a country of over one billion people, Mr. Premji stands out with an estimated net worth of $6.7 billion. The Stanford-educated Premji turned his family’s vegetable oil business, Wipro, around, transforming it into one of the world’s premier outsourcing companies, alongside Infosys and Tata Consulting.
I also know that India boasts nearly half of the world’s poor people in the world. That being said, Premji has helped India raise its standard of living and has improved the efficiency of American businesses.
Give credit where it’s due…
Furthermore, Premjii wasn’t even an appointed leader. He just took a family business and blew it up! So, as far as I’m concerned, pay him what you want. There’s no need to send me a letter outlining Mr. Premji’s entitlement to housing, medical reimbursement, leave travel concessions, club fees, group life insurance, provident fund/pension, gratuity, use of a car with a driver, telephone facility at residence, servant, watchman, and gardener.
Wipro earned nearly $500 million in profits on revenues of $1.7 billion… and I couldn’t care less how many servants, watchmen and gardeners Mr. Premji has at his disposal. As a shareholder, I care about the business he manages. If I were an employee, I would care about getting my salary on time. And if I were certain media outlets, I would find an actual story to report.
E-mail of the week:
I am an IT Consultant with a worldwide Big 4 consulting firm. I am responsible for delivering business benefits to clients through IT strategy that is custom-designed and implemented (mainly in the area of business software involving analysis and planning). Increasingly, there is an emphasis on sales and deal-making to give impetus to one’s career. In fact, unlike in other mainstream businesses, where sales and operations are kept separate, in consulting firms the two groups are often merged. Since I am more focused on the “delivery arm” of the company but would like to focus on the sales side, I require some generic yet useful points to remember. Please note that since we deal with intellectual property (consulting services) and not any tangible product, the sales require different positioning. I know it’s a specific topic but it’s relevant to lot of consulting folks, especially those in the business and IT environments.
By now, as you should surely know, I have insights on everything — whether or not they are right on and applicable to you is the question! Jokes aside, I think that you are actually encountering a very common dilemma. Ages ago, I was a young customer service agent for a major bank. In specific terms, my job was to attend to clients’ needs and solve their problems. It soon became clear, however, that at the root of some problems was the fact that clients did not have the right products.
In light of these circumstances, my approach in dealing with customers was to first determine their situation, assess their needs and then recommend solutions that would eliminate the short-term problem and ensure that others would not pop up down the road. Without knowing it, I was essentially selling them other services and products. Once in a while, this meant that I was “down-selling.” In my view, this was better because at least we retained the client. Frequently, however, I would find myself up-selling by offering the client a better product that might cost more to them in the short term, but would save them money or improve their overall services in the long term. The key was that I was candid with them and gave them an honest assessment. In consulting, you have to keep that in mind. If you recommend solutions that only help you hit your quotas but do little for your client, then your customer base will shrink and you’ll be doing a miserable job.
In my eyes, you currently have a great opportunity to be an honest assessor of a client’s situation, needs and problems. This gives you a tremendous chance to win their trust over. Once you do that, you can sell them anything, so long as it really helps them, your employer and, in turn, yourself.
Ash Karbasfrooshan is also the author of Course To Success, available at www.CourseToSuccess.com. His new book, The Confessions of Alexander The Great: 33 Lessons in Greatness, is available at www.AlexanderTheBook.com.