Overpaid Executives: The Greed Effect

“Few people- and probably no one outside the executive suite – sees much reason for these very large executive compensations. There is little correlation between them and company performance.” Peter F. Drucker, The Frontiers of Management (1986).

It took Drucker over a decade to finally address the issue of overpaid executives in his book, The Frontiers of Management (1986) when he described the “Greed Effect.”

Perhaps it was the decade of the “go-go” 1980s and the big bucks being made by the “wheelers and dealers” on Wall Street that finally got to him? (Sound familiar?)

Although he tended to still present a case that compensation between management and employees, when inflation and taxes were taken into account were not that dramatically out of balance, he did acknowledge the growing concern in the country with excessive executive compensation. He did down play this to a certain extent by saying this was attributed to “a very few top corporate executives.”

Perhaps recognizing the futility in attempting to describe this as a non-issue he clarified his position - or capitulated - by stating, “But perhaps the real issue is not aggregate “executive compensation.” It is the compensation of a tiny group – no more than one thousand people – at the top of a very small number of giant companies. Statistically this group is totally insignificant, to be sure. But its members are highly visible. And they offend the sense of justice of many, indeed of the majority of management people themselves.”

Drucker’s Solutions Drucker did suggest a number of possible solutions to the “Greed Effect.” These included:

1. Establish a Visible Link – Drucker suggested perhaps there should be a link between executive compensation and employee welfare and their employment security. This he felt would prevent what he considered employees resent the most – top people getting big increases in the very year in which a company slashes blue- collar and clerical payrolls. He also felt this created a possible drawback in that it would reward top management for keeping employment but would increase operating costs.

2. Limitation on Total After Tax Compensation – Here Drucker suggested a “voluntary” limitation on the total after-tax compensation package paid to the chief executive officer – to a preset multiple of the after-tax total compensation package of the lower level employees. He felt that if the multiple were set at 20, it would affect approximately 500 executives in the U.S. and at 15 perhaps it would affect one- thousand executives. At the 20 multiple he forecasted executive compensation would be limited to $850,000 and at the 15 multiple the limit would be $650,000. Keep in mind this was over twenty-five years ago.

3. Charitable Contributions – Some argued that executive compensation actually designated the cultural rank of the executive in the organization and was a “badge” rather than “real money.” Drucker countered this argument by suggesting that if this was the case, then the excess compensation over the designated multiple limit paid to the executive should be donated in his name to a charitable organization of his choosing.