Executive pay in a declining economy

No, I am NOT simply complaining about the greedy fat-cats at Enron, Worldcomm and Tyco. Beyond those outrageous examples, a sense of "entitlement" has become quite common at executive levels, emphasized during the recent business decline. As people go higher up the ladder they seem to grab more and more for themselves. Their social conscience disappears; have you ever heard of anyone turning down "big bucks"? Indeed, my use of the phrase "social conscience" brings howls of laughter and ridicule for my naiveté.

Management guru Peter Drucker warned that the growing pay gap between executives and workers threatens the credibility of leadership. He suggested (in the mid-1980s) that top executives should not earn more than 20 times the lowest-paid employee. His reasoning: If the CEO took too large a share of the rewards, it would make a mockery of the contributions of all the other employees in a successful organization.

In the US, the typical ratio between a CEO's pay and that of the average worker is about 100:1, with some at 500 or even 1000:1. In Europe the ratio is lower (perhaps 50:1) though many Europeans are pushing to catch up to their US counterparts. For major economies, Japan still has the lowest ratio - about 10 or 15:1.

The recent massive increases in executive salaries, especially in a declining business environment, make Drucker's suggested standard appear outdated. In the past decade, as lower level wages increased about 30%, executive pay has climbed 400%. And worse, while long-term employees get laid off during a business decline, and some lose their pension entitlements, compensation formulas deliver big bonuses to executives. This situation is ridiculous, but not uncommon.

Top executives generate vast wealth through abuse of something that was once though to be enlightened: stock options. Previously, in a bull-market, options gave executives higher pay when shareholders profited. But as the market crashed and shareholders lost their shirts, executives went right on raking in the bucks.

With our automation slant, here is a listing of year-2002 salaries for automation-related companies. Note: Stock options and other perks NOT included.
(Sources: Yahoo, Google)

Note : The numbers not easily available for comparable executives of foreign companies: Siemens, Schneider, ABB, Yokogawa. As mentioned, European and Japanese salaries are lower than US levels.

In a large, public company, the board "executive compensation committee" typically does a comparative review to set CEO and senior compensation. You can guess how that normally pans out. Comparably, salaries for Rockwell and Invensys CEOs need to be boosted...(!)

It has become common for top executives to shield themselves from losses in a falling market. Despite poor performance, they award themselves huge options, and make performance goals easier to reach. Many companies typically swap or re-price options when old options become valueless. Often, board members and executives "award" each other options and pay increases. Plus, they protect themselves with 'golden parachutes' - long-term contracts; so even if they are fired, they get continued long-term payments.

Who can question these salaries? The employees cannot; the executives don't flinch; the CEO is usually the kingpin; the board shares the booty; the shareholders are helpless.

Frankly, when I mentioned (previous eNews) that the solution to these problems was "discussion at all levels", I felt somewhat stupid. And, I didn't want to suggest legislation - that felt even more ridiculous.

The eFeedback section (below) includes a solution to this problem - from Roy Slavin [royslavin@cox.net] formerly President of Siemens Industrial Automation USA, and Wonderware. This from someone who has first-hand, top-level experience.

Stay tuned, as we expose these problems, and the solutions that develop in a new business environment.

Automation updates

Rockwell CFO resigns - Don Davis to retire soon - who will be CEO?

CEO Don Davis, who turns 64 in December, has made it clear that he doesn't expect to work full time by the time he's 65. His replacement is expected to be announced soon. The leading contender is Keith Nosbusch (52) who, like Don Davis, has been at Allen-Bradley for decades. However, don't rule out a significant outsider. Many (like me) still expect Rockwell to be acquired, or merged - that move is overdue.

Rockwell shares dipped somewhat this week, hovering around 26, but still below Don Davis' target of 30. Market-cap is $4.9bn. Hmmm....

Danaher the primary bidder for Invensys metering division

Invensys metering has annual sales of about £550m ($800m) and is expected to fetch a price of 1X Revenue. Rick Haythornthwaite is better at selling off companies than managing them, and he might squeeze out a bit more. Signaling the increased expectations for break-up value beyond 30p, Invensys shares inched up over that value and market-cap crept back over £1bn.

ABB managing its way out of past problems

ABB is well managed and has always had a healthy corporate culture - perhaps affected by too many acquisitions. In spite of some recent workforce reductions, the company seems to be moving ahead strongly. Financial results for the first half of 2003 were good, achieved during a period of decline in all major markets. Core division orders increased by nearly 9%, revenues increased by 15% and earnings (EBIT) climbed 24%. This reflects a solid trend for the past 3 quarters. ABB shares are trending up at 5.2, with a market-cap of $ 6.24 bn.

The scourge of email: spam, viruses and worms

Up to now, I have been very patient with my email. I simply click away spam, as I sort out my valid emails. When there is a pattern of objectionable messages, I use my Outlook "rules" to delete them. Till this week, I was well pleased with my email defenses.

I had successfully avoided the original Sobig - messages asking for an attached file to be clicked. I NEVER click on an attachment, especially when the email is unsigned. In any case, my Norton anti-virus deletes any virus attachments.

But then, this week, Sobig.F arrived. I started getting hundreds of emails, all neutralized by Norton, but nevertheless accumulating in Inbox. And then several hundred an hour! So, I put in an Outlook rule - if certain words are found, delete!

But then - I started getting hundreds of messages from others, telling me that my message has been received, and that it had been deleted by a virus detector. Ouch! Even though I had NEVER sent out a virus, emails had been sent with my return address. So, I was getting rejection responses - hundreds of them! So, I developed a rule for that too.

Then, as the effects of that Sobig.F worm subsided, I got another attack! This was not a virus, but a spam nuisance. Someone from Nigeria, Mrs. Something-or-other, wanted my help to transfer $35 million, with a percentage in the deal for me. I'm sure you have already received this spam too (now coming from other countries, and some even from various locations in Europe). But now, suddenly I was getting 2,000 or more emails every few minutes. By the time I had developed a rule to delete them, 10,000 messages had already accumulated in the mail-server, over-loading my mailbox. Solution: I worked with my service provider to delete this spam when it arrived at the server, before it could get to my mailbox. Of course, this may not be possible without a VERY helpful ISP.

These thousands of spam messages occur because all email is essentially free. Many spam servers simply rotate through the alphabet, spewing out spam continually, looking for hits (valid addresses). It doesn't cost anything to send millions of emails - so spammers send millions of emails. How can that be stopped?

Viruses and worms are intentional and malicious. How can that be stopped? How will this affect email in the future? The solutions themselves could eventually destroy the usefulness of free email.

The Google calculator

You can type these numeric expressions, either directly into the Google search box or directly into your Internet browser if you've installed Google's tool-bar software (which I mentioned in a previous eNews, 14 July 2003).

Google's calculator doesn't just do simple calculations. It can also handle conversions. For example, you can type in "tablespoons per cup" and Google will reply "1 US cup = 16 US tablespoons". Or, you can convert millimeters into inches, or hectares into acres, or furlongs into kilometers. You'll get the answer, and a Google link: "More about calculator".

Google's calculator goes beyond basic arithmetic. It can do complex math and crunch physical constants as well. It can process queries such a "speed of sound in mph" (Answer: speed of sound at sea level = 761.207051 mph) or "cosine 35 degrees" (Answer: cosine(35) degrees = -0.0157724044). You can also experiment with other numbering systems, including hexadecimal and binary.

Hey! Go ahead, try it!

eFeedback

"I couldn't agree more with the issues you have cited. I do, however, believe that your solution: "discussion and understanding at all levels toward enlightened self-interest" is not viable.

"There is NO open discussion in a corporate hierarchy. There is sometimes the illusion of discussion; but we all know that is BS. And the notion of understanding is a given - everyone wants what they want, period. There is no better example of the lack of discussion and understanding than your JimPinto.com website: the people working in those companies have NO real outlet to express themselves. In fact, I can assure you that even opening up your website for others to vent has made you an unloved guy in many automation boardrooms.

"Greed is not rational. Fear is not rational. Yet they make the world go 'round. Other societies have tried to control these tendencies through the concept of economic balance. They create a system of balances between mutually 'self-interested' parties. Labor balances management. 'Have-nots' balance 'haves'. There is no such thing as 'enlightened self-interest' - there is only 'self-interest'. There is only greed. To balance this greed a society needs other interested 'greed'.

"The system worked reasonably well for most of the twentieth century in the US. Labor rates drove the remuneration of the rest of the organization. The problem is that labor has just about gone away. The labor movement no longer has, or is willing to use, its economic power. Non-unions employees always got a free ride on the backs of labor. No dues. No risk. No strikes. Just a cost-push.

"The incredible greed shown by management (this is not a recent trend by the way; it has ALWAYS been the rule) can only be offset either by legislation, or power of equal or near equal strength. Legislation in the US with regard to business conduct has always been a joke. It just doesn't work!

"My conclusion: people working in institutions must raise their voices. They must organize and strive to get their piece of the action - at the expense of all the other players: government, stockholders, board of directors, and especially the top levels of management. These institutions are all self serving, and none of them represent the ordinary corporate clone. The free ride that the labor movement provided in the past is gone.

"Gandhi had the right tactics for today's corporate imperialism aka 'globalization': peaceful resistance and civil disobedience. Until the people who work for these large organizations stand up and push back, with a single voice, they will continue to eat shit.

"I believe the time has come for some form of real 'corporate disobedience'. There is nothing, either in legislation nor in the integrity and backbone of the vast preponderance of corporate boards, to reign in the likes of Invensys' Yurko, or Tyco's Koslowski. It's a joke to watch the so-called leaders of large corporations give their pep talks about the bottom line, shareholder value, grow or die. I know. I did it for more than 30 years. At the end of the day there is only profit - quarterly is good, but absolutely necessary annually.

"There are the endless programs: quality, cost reduction, six sigma, zero defects. I don't have the stomach to recall them all. The only result was ultimately more money to the bottom line. I can assure you that very little of those real savings ever go to the people below - the 'clones'.

"The corporate 'state' can be every bit as terrorizing as any third world dictatorship, physical torture and death notwithstanding. The lack of concern for the emotional stability of the clones and their families is a societal issue that the American government has shown no interest in addressing.

"The clones have only one choice: realize they are at war with the corporations that they work for, and act accordingly. The example must be nonviolent disobedience. I cannot come up with any reasonable alternative.

"Imagine the damage that can be done by a discontented and organized white-collar workforce. Even a white-collar 'slowdown' would have significant impact. E-mail surveys would give top management and boards some feedback in regard to unpopular and unsupported decisions that impact the well-being of the workforce. The punishment for ignoring the will of the workforce could consist of attacking the IS systems with overload. For instance, screw up the accounts receivable ledgers. The choices of potential sabotage are easy and effective. The ability to remain anonymous is available. Most importantly, the laws prohibiting such actions are ambiguous, unenforceable, and inconsistent.

"The history of the labor movement is replete with examples of peaceful push-back. The white collar movement needs some leaders and heroes; no one has risen to the challenge. Politicians cannot be trusted, only bought. One needs a legal organization with the ability to raise money to buy them. It's clear: the only thing that offsets GM is the UAW. Software developers are now in the same category as factory labor, albeit at a much higher remuneration point. Their jobs will be exported; India, China, East Europe can all do it cheaper. What will they do? Nothing, but lose their jobs and join the ranks of over-qualified McDonald's workers or Wal-Mart greeters.

"I don't know when the era of white-collar 'corporate disobedience' will arrive. But it will...."

Globalization is not the "outmoded, irrelevant and dangerous" creature that you paint it to be. It is the result of a quantum jump in communications abilities (email, cell phone, fax, internet) coupled with crumbling of barriers everywhere (not just in the US). By barriers, I mean language, ethnicity, customs duties (anything that can be a barrier).

"All these years when people were living in isolation, there were complaints like "we have too much government interference", "too many barriers to free trade", "local vendors are treating us badly because we do not have the power of choice", etc., etc. It is remarkable how this very band of preachers, who wanted all these things, now blame globalization for all their ills. Globalization is a result of all their wish-lists coming true. Now that it has finally arrived, some people do not want it. They would like somehow to go back in time to "the good old days" (of less choice, less purchasing power, less opportunities for their children, less of many things).

"Basically the problem is that people, in general, resist change at all costs. Nothing is good or bad. It is how we react and adapt to situations. Some people will always find a way to profit out of so called "bad" situations, and some people will never be able to take advantage of so called "good" situations."

"Whether or not the USA is headed for a financial crisis is a topic worth discussing - but it must be placed in perspective.

"You begin by talking about projected Social Security shortfalls some 39 years in the future. That is certainly worrying; but look at it another way - what were you doing 39 years ago? I was starting college with a generous, parent-funded budget of $100 per month. I had real money in my pocket and was better off than 80% of the kids on campus. Today I get paid that in less than two hours and it never seems like enough. In 1964, I never imagined such a lifestyle, much less made a financial forecast about it.

"Just a few years ago, at the height of the '90's dot com bubble, there were financial forecasts that showed that the US Government would pay off the entire national debt in 10 years, and the Social Security Trust Fund (as it accumulated funds for us Baby Boomers) would become the largest investor in the world. Today, the budget deficient is estimated to be $450 billion this year alone!

"We can debate the causes of this change ad nauseam. But there is one underlying fact we must understand: extrapolating long term trends from short term data is almost always wrong. The questions we should ask are what has been the trend over the last 39 years? What measurable, non-economic factors have changed that might affect the future (like population, technology, etc.)? Then we can have a small change at making a good forecast.

"Remember Friedman's First Law of Forecasting:
'It is very hard to forecast, particularly about the future.'"