Tuesday, May 29, 2007

Another view on the PM's address at CII

I mentioned in my post yesterday, No takers for PM's homilies, how the PM has been panned for his sermonising to industry. In today's TOI, we get a different viewpoint from Arun Maira, chairman of Boston Consulting Group in India. Maira argues that restraint on executive pay may not be such a bad thing:

Two arguments are made against restraining CEO salaries: one, that salaries must conform to market forces, and two, that it is good for people to show off their wealth because it encourages others to strive for such wealth. Let us consider these arguments. The first says that since there is competition for leadership talent, industry has no option but to pay to get the best. However, there is no clear correlation between salaries paid to CEOs and the performance of their companies. Even in the US, companies with the best paid CEOs do not necessarily produce the best results. In fact, companies with lesser paid CEOs often perform much better. The explanation is simple. ....

Besides, real leaders have goals that go beyond their personal wealth. Indeed, they have options about how much they want to be paid, how they will spend their money, and what they will do with their lives. Though they should be paid a reasonable salary, it is often not more money that those with real leadership potential seek.


Krishnan said...

If there is indeed no correlation between CEO salaries and company performances, shame on the board/group that hires such people. One starts to wonder as to what the heck they do then.

Companies can advertise for talent by stating upfront that they will not pay more than 5 times or 10 times (or whatever) than some average salary/benefits, and see what talent they can muster.

It makes perfect sense to me as to why people seem outraged at the PM's comments and not what industry titans may have said. Industry/private titans have reasons to blunt the criticism and take the focus off their operations, so they will say whatever it takes to make it look like they are being "socially responsible" - I mean, is it really possible to follow through and see what they actually do? Are they willing to lose talent to a competitor because they are unwilling to pay what it takes? I do not think so.

Nardelli of Home Depot was hired for a lot of money, he was a dismal failure. The papers were all over him about his "severance" package of 200+ million dollars. Fact is: it was not severance, it was a deal he had worked out BEFORE he was hired and there was a contract. Home Depot was not willing to breach a signed contract. Yes, this is an example of a dismal CEO.

When Jack Welch retired from GE, I saw an analysis of the increase in shareholder value during his tenure - inspite of his "enormous" salary/stock/pay options - the analysis concluded he was one of the lowest paid (in terms of increase in market value) - yet, people dumped on him for "making too much money" - people simply forgot the impact had, on GE. One may argue that he should not take ALL the credit - but one can be sure that if he had failed, he would have been blamed and fired.

Anonymous said...

All this talk about 'CEO Pay for Talent' and 'Increase in shareholder value due CEO performance' are 'Stylized Facts' reported by the media.(Reference: Wikipedia) All these CEO assessments need to be done in the context of the status of the industry and the firm - may be the past investments pay-off coincides with period of the incumbent CEO. Correlation is not Causation ! Organizations have not matured to the state where they can systematically evaluate CEO's contributions... So profit making organisations pay more to the CEOs for whatever value the key stakeholders perceive and it may not be always talent though it may be publicly admitted as talent .....