Power, Corruption, and Lies

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For once, let's briefly set aside the debate over whether CEOs deserve their often astronomical compensation. Instead, let's tackle an interesting spin on the question: What effect do these fat paychecks have on executives' souls?

Scoring the meanness factor
According to a recent blog post from the Harvard Business Review, researcher Sreedhari Desai contends that high levels of compensation make corporate leaders more ruthless, thus leading to poor treatment of workers and other negative outcomes.

Desai crunched data from socially responsible investing firm Kinder, Lydenberg, Domini & Co., popularly known as KLD, to compute a "meanness score" for firms. The higher a company's executive compensation, Desai discovered, the higher its score.

She also reported "disheartening" results from her own lab tests on the ability of individuals in power to lie, tying her findings into past research on the nature of power. According to "power holding theory," human beings in positions that give them control over others often find ways to rationalize some of the unpleasant, unethical things they do. Executives' staggering salaries may be cushioning them from the realization of their own fundamental unkindness.

Is CEO compensation a race to the top ... or the bottom?
If Desai's theory is true, it could explain the recent escalating outbreak of bad behavior in corporate America.

According to the AFL-CIO's executive compensation data, in 2008 the average CEO made 319 times as much as the average worker. That's well off 2000's bubbly high of 525 to 1. However, in 1990, the ratio was 107 to 1. And if you flash back to 1980 (skip the shoulder pads and big hair, please), that ratio was a modest 42 to 1.

Thankfully, out-of-control CEO pay has recently taken the spotlight, amid historic shareholder votes to reject policies that disconnect payment from performance. Investors at Abercrombie & Fitch (NYSE: ANF  ) , Motorola (NYSE: MOT  ) , and Occidental Petroleum (NYSE: OXY  ) all smacked down imprudent executive pay plans this year.

Meanwhile, several companies have taken a more "stakeholder-driven" approach to their businesses. Costco's (Nasdaq: COST  ) Jim Sinegal has always been known as a modestly paid and excellent corporate manager. Whole Foods Market's (Nasdaq: WFMI  ) John Mackey, a proponent of conscious capitalism, has also stuck with modest compensation; Whole Foods caps executive salaries at 19 times the average worker's pay. Both Mackey and Sinegal have built and/or run great businesses, while rejecting the temptation to excessively enrich themselves at workers' expense.

Power corrupts
Greed gets the blame for much of our current market mayhem, but hubris and arrogance may be even more responsible. Desai's data correlating compensation and cruelty could explain corporate America's excess of failure, occasional flirtations with fraud, and lack of restraint and remorse. Look no further than financial companies like AIG (NYSE: AIG  ) , which insisted on hefty paychecks last year despite receiving taxpayer bailouts.

Executives absolutely deserve to be paid well for high-quality work. Otherwise, why would anyone even consider doing a good job? However, CEOs who demand too much pay for too little performance, to the detriment of workers and shareholders alike, may be letting their power go to their head. Under a heartless, capricious CEO, quality could suffer, more mistakes might be made, employees would feel demoralized and abused, and shareholders would likely lose their shirts.

"Power, Corruption, and Lies" -- it's an awesome title for a classic New Order album, but it makes a lousy way to run a business.

Check back at every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Costco is a Motley Fool Inside Value selection. Costco and Whole Foods Market are Motley Fool Stock Advisor picks. The Fool owns shares of Costco. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (38)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2010, at 7:52 PM, jomueller1 wrote:

    It is a joy to read that there are some leaders in business with a conscience. But it is especially the financial industry that insists on insane payouts. And these businesses do not even produce anything! That does not stop them from calling their toxic papers "financial products". All those papers produce is unfair income for the vendors and headaches for the buyers. I have a Wall Street guy in the family and he thinks of himself worth a lot and I, as a simple electronics engineer and computer scientist, am barely worth talking to.

    The game Monopoly gets the points across better than any study. I personally would make it a must-do subject in school to play the game, observe the behaviour of the players, and learn how to avoid the mean spirited actions.

  • Report this Comment On July 07, 2010, at 7:58 PM, richsue3 wrote:

    This articles results are skewed. When CEO's get power they SELDOM interface with employees below management rank. As for being liars, I would ask when and how she was able to determine that/ Did she catch them lieing or just guessing that financial results showed different from what they said? These so called do gooders have axes to grind and they always say ALL when degrading someone.

  • Report this Comment On July 07, 2010, at 8:24 PM, xetn wrote:

    This article is not worth the time to click. I personally do not care what a ceo makes. His salary and total compensation is determined by the board of directors or the compensation committee. If they determine (s)he is worth so much, so be it. If you don't like the fact that some ceo makes 600 times the average worker, don't patronize the company. It is none of your business. This country is supposed to be based on free market ideals and as such, you are entitled to what ever you can negotiate. You are entitled to your opinion. I could say that you don't deserve what you are being paid, but what difference does that make?

  • Report this Comment On July 07, 2010, at 9:32 PM, 7t52day wrote:

    And at what particular time in your life did conscience fly out the window?

  • Report this Comment On July 07, 2010, at 9:54 PM, ds10 wrote:

    The previous poster is incorrect. If you are a stockholder of the company, then it absolutely is your business to keep an eye on managements' pay and performance. You are an OWNER of the company and have an owner's responsibility to ensure the company is following ethical practices and that the compensation of the CEO reflects the success he is bringing to the business.

    An example of failure by stockholders and Board to act responsibly when a company leader receives excessive and undue compensation can be observed in Merrill-Lynch's recent fall from grace.

  • Report this Comment On July 08, 2010, at 3:40 AM, cordwood wrote:

    Ahhh,..."....but in order to attract and retain..."- I believe that is the usual line.

    My retort is : Observe the Green Bottle fly and what attracts it.

  • Report this Comment On July 08, 2010, at 8:43 AM, joroi wrote:

    The title really did not match the article. You don't need a sensational title to weigh in on the on-going debate of executive compensation.

    My take is that executive compensation should always need a shareholder approval, and shareholder approval only. Nobody else, least of all the buggers in the government or Congress.

  • Report this Comment On July 08, 2010, at 8:55 AM, ewent0 wrote:

    CEOs who are handing themselves the power and might of government influence with their big salaries create plutocracy where the masses are governed by those with the most money and money influence.

    Anyone who believes it is just, equitable or sane to allow CEOs to shovel billiions into their bank accounts at the risk of destroying democracy is a fool headed to be the slave of the Big Money master.

    It isn't new that certain individuals aspire to the heights of astronomical salaries no matter how ruthless they become. The documentary on Enron clearly shows what happens when the slick articles in the corporate world lose touch with their own sense of integrity and all for that first membership card in the Trillionaire's club.

  • Report this Comment On July 08, 2010, at 12:09 PM, sails2 wrote:

    The company I retired from had a CEO that was, it seemed, determined to get everything he could. He tried to set it up so that the executive floor could only be accessed by those with special key cards. Talk about talking only to themselves. One VP told him that this was nuts. He soon left. It took maybe $3Mil of shareholder money to give this guy a retirement sendoff. The fellow who followed him had too much of a mess to clean up and ended up selling the firm.

    Shareholders are stakeholders.

    Employees used to be stakeholders.

    Our society used to be a stakeholder.

    And anyone questions loyalty?

    Kevin Phillips has a couple of books we should all read - Wealth and Democracy being one.

  • Report this Comment On July 08, 2010, at 1:22 PM, TMFTheDoctor wrote:

    "Executives absolutely deserve to be paid well for high-quality work. Otherwise, why would anyone even consider doing a good job?"

    Warren Buffett once said he loves his job so much he'd do it even if they just kept him in a room and slid bread under the door periodically. I doubt that's quite true, but what's nice to see is executives who consider doing a good job just for the satisfaction of a job well done.

  • Report this Comment On July 10, 2010, at 10:23 AM, pgfanap wrote:

    Power,Corruption and Lies....Humm, this has a familiar ring to it in the "hallowed halls" of our nation's capital. Maybe Sreedhari Desai should complete a similar study of our entrenched politicians. Term limits anyone?

  • Report this Comment On July 14, 2010, at 2:07 PM, mDuo13 wrote:

    richsue3 - your idea that CEOs rarely interact with anyone below management rank is true, but shortsighted. There is a ripple effect - a bad CEO brings on worse lower managers and makes it harder for the managers already at the company, who in turn make it harder for rank-and-file employees to get their jobs done efficiently and pleasantly. I've seen it happen firsthand and I've heard the same story at different places from many different people.

    The mistake that companies keep making is to think that prior experience automatically makes one a better CEO. The captain of a sinking ship might have learned his lesson, but the first mate of a successful ship is just as viable...

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