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When
You’re in the Club
‘How
much money would you like to earn this year?”
I’ve seen and heard this question before. E-mail solicitations.
Classified ads in the “Business Opportunities” section. One
evening years ago, my wife and I were socializing with a couple
we had recently met, who, we thought, were just looking to
meet people with similar interests and make new friends. The
conversation was pleasant and innocuous for a while, until
the man leaned forward, his face turning all serious and purposeful.
“How much would you like to earn this year?” he intoned. Turns
out, they were cogs in a pyramid scheme, recruiting people
to sell mail-order household products.
The point is, I’m wary of “name your income” schemes that
don’t fall within the realm of standard contracts and salary/wage
agreements. One can always negotiate those, but let’s face
it, the vast majority of us are negotiating within a relatively
small window of possibility as dictated by the market we live
in, the field we work in and the skills and experience we
bring to the job. And when compensation is determined in part
by performance, well, you’ve gotta perform. If you are a salesperson
and your target is to sell $75,000 in the third quarter, and
you sell only $50,000, your boss isn’t going to say, “Hell,
take the commission on the extra $25,000 anyway.” It just
doesn’t work that way.
Unless. . . . you’re in the club.
In a June 1 article titled “Big Bonuses Still Flow, Even if
Bosses Miss Goals,” The New York Times detailed the
latest twist in a general phenomenon that’s becoming all-too
familiar: Not only do top American corporate executives make
enormous sums of money (and still more compared to rank-and-file
workers than anywhere else in the world, although Europe and
Japan are trying to emulate us); not only are top U.S. execs
rewarded with lavish raises and bonuses even when the company
underperforms and shareholder value diminishes; now, the Times
reports, investors who take the time to plow through company
filings are finding more and more cases where executives whose
pay is tied by contract to specific performance goals are
getting the extra pay whether the goals are met or not.
Shareholders (and most of the rest of us ordinary folks) are
understandably livid when they find out that bosses are being
paid bonuses they’re not supposed to get when share prices
are dropping. But as a few high-profile corporate-fraud cases
have made all too clear, even many in the so-called investing
class are considered expendable to the people at the top.
Many typical middle- and upper-middle-class investors may
live relatively comfortable lives, but that doesn’t mean they’re
in the club.
Besides being angry, many people are genuinely puzzled that
executives are getting raises and bonuses that are supposed
to be performance-based when the company is actually losing
value. Why would the boards of directors who run the companies
and the compensation committees who determine executive pay
do things that are not in the companies’ best interest? Well,
maybe they don’t have the companies’ best interests in mind.
Maybe they have each other’s best interests in mind.
To begin to understand how this might be so, think about power
structures at almost any level, and how people who hold power
often look out for their perceived peers (and of course, their
friends and family). Notice how the crony who is forced to
resign from his cushy patronage job winds up in another equally
cushy job. Remember the rich kid who got into trouble and
got kicked out of Choate? He went to Exeter. Incompetent or
otherwise undeserving people with good connections tend to
fail sideways, if not upward. In fact, I can think of a really
good example of an incompetent person who has failed to the
top, if you know what I mean.
But connections are only part of the story, albeit a big part.
The other part involves the psychology and sociology of decision-making
at the top; the psychology and sociology of the club. If you
spend any time around super-rich people who also happen to
be greedy and not particularly charitable toward the less-well-off
(and it’s important to note that not all rich people are like
this), one thing that will strike you is how deeply they believe
they deserve everything they have. And they are loath to allow
any misfortune or inconvenience take any of it away. Around
the time I taught at a very wealthy private high school, I
read that the secret to wielding power is learning to make
decisions—even ones that might harm other people—without remorse.
At that school and elsewhere, I have seen that credo at work.
The sociology comes in when people of this class get together
to make decisions—say, when the compensation committee meets
to set the CEO’s pay. There are a number of factors at work
here (see research on the subject by Charles O’Reilly of the
Stanford Graduate School of Business), but suffice it to say
that they mostly tend to favor a huge pay package. For one
thing, the committee members are likely all of similar class,
status and income, and will see the executive as equally deserving,
more so if they perceive him of higher social status. For
another, the committee members and the executives whose pay
they are setting may be connected in interesting ways—anything
from prep-school buddies to the possibility that the CEO himself
appointed them to the board.
If you want an extreme example of the behavior traits of members
of the club, look no further than the late Enron CEO Ken Lay,
who presided over the largest corporate fraud in U.S. history.
Not only did he approve of schemes that ultimately cost his
shareholders and employees millions; not only did he defraud
California residents by manipulating prices during their energy
crisis; not only did he profit handsomely from all of this.
In his final stand, Kenny Boy told the court he had done nothing
wrong. Talk about wielding power without remorse.
I have heard the theories, and I have no opinion, because
any of them could be true: He died naturally, he committed
suicide, he’s on an island somewhere. But in his (apparent)
death, Ken Lay has made one last gift to his family: They
likely will not have the family fortune taken away. How much
money will they get this year, and every year for the rest
of their lives? I don’t want to know.
—Stephen
Leon
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Classifieds
