Thursday, October 10, 2013

Business Report

In the US, the top 1% in income now bring home almost a quarter of all income, up from about 12% in 1990, according to statistics of the Organization for Economic Co-Operation and Development. China too has seen more rapid growth at the top than at the bottom, to the extent that the top 5% of Chinese households take home about 23.5% of income, according to a recent survey of Chinese Family Panel Studies of Peking University.

Between 1978 and 2012, the average CEO pay for the top 350 US firms rose by a whopping 875%, even as the wages of the typical worker rose 5.4% over the same period, according to data from the Economic Policy Institute, a Washington think tank. In 1978, the average CEO brought home 26.5 times more than the average worker. Today, the multiple has risen to 272.9 to 1. But Chinese chiefs looking for a plumper pay packet may not need to head east: compensation consultants ECA International estimate that if current rates of growth continue, Chinese executives will actually earn more in purchasing power terms than their American counterparts by 2017.

Gordon Gekko, the movie Wall St character , may have been wrong: greed doesn’t work. The evidence that what’s good for the boss is good for the business is actually relatively weak.

MVC International, a management consulting firm based in Toronto and Tampa, found that the 18 Fortune 500 firms that paid the most to their top executives over a five-year period (GE, Boston Scientific, and Motorola topped the list) actually got surprisingly little for their money: none of the 18 produced a positive economic return above their cost of capital, and half also ended the period with a lower stock price than at the beginning. High executive pay may also be expensive because it encourages excessive risk-taking. More than a few analysts have seen connections between investment banking’s bonus culture and the risky lending practices that led to the 2008 credit crisis and the end of Lehman Brothers and a number of other financial institutions in the US and the UK. Current pay practices appear to encourage the CEO to focus on short-term operations instead of the higher-level long-term strategic thinking that actually creates value, according to Mark Van Clieaf, Managing Director of MVC International: More than 80% of the top 1,500 companies in the US lack a strategic plan that goes beyond three years.

Many organizations to save money and increase customer responsiveness and innovation by pushed more decisions to lower-level management. However, a recent paper by Julie M. Wulf, an associate professor at Harvard Business School, summarizing a number of studies she and several colleagues conducted over the previous decade, argues that reducing layers actually encouraged CEOs and upper level managers to spend more time on internal operational decisions. The growth of the inward focus of the CEO went along with hikes in upper level functional managers’ pay. Meanwhile, division managers’ relative share went down. As pay and power tend to go hand in hand, Wulf and her colleagues theorize that more decisions are now being made at the top instead of nearer the front line. In the end, reducing hierarchy has had the ironic effect at many companies of making the firm more hierarchical. Wulf also writes that it is harder now for CEOs to groom talent because of the lack of clear promotional paths. Lower-level managers who see slim prospects for a real promotion may be less loyal.

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