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Capitalism Isn’t Broken, But It Does Need A Tune-up.

October 26, 2011

While this is a blog focused on ideas that support the efforts of entrepreneurs attempting to crack new markets, from time to time I share tangential material I hope will both make you think and enhance the courage of your entrepreneurial convictions.   Here is one such piece that will make your blood boil about what’s really going on in boardrooms across America re: CEO pay.   Below are some excerpts from  “Why America’s Highest Paid CEO’s Are Insanely Overpaid” that I hope will inspire you to read on:

[Update (10/27):  Just came across this piece that suggests the issue is equally severe in Europe.]


With its recent list of America’s 25 Highest Paid CEOs, Forbes has catalogued one of the great malignancies of our society. A monstrous canker so metastasized that it stretches credulity to comprehend the full absurdity.

Two of the men on this list I honestly admire and are exempt from my following criticisms. They are Ralph Lauren, a self-made man, creator of his fashion label, employer of some 24,000 worldwide. Ralph comes in second-place at $66.7 million. The other, Larry Fink, co-founder of BlackRock (in 16th place at $39.9 million), has in two decades built one of the largest asset management firms from scratch, employing 9,700. These men are entrepreneurs, visionaries, creators of jobs. They deserve their annual haul.

The rest, for the most part, are to be classified as merely managers, or caretakers of their shareholders’ property. Yet they, inexplicably, are compensated as if they were visionaries. This is wrong.

There are tens of thousands of entrepreneurs, owners of businesses small and large who have worked 30 or 40 years or more and who started their businesses with next to nothing. They have taken extreme risks, survived business cycles, manufacturing problems, labor issues, working capital shortages; the list of vicissitudes is endless. There were sleepless months over finances and personal liability on loans. Many have their entire net worth tied up in their business. At the end of their journey but a fraction of even the most successful could dream of cashing out with $131.2 million let alone earn that in a year.

Many business startups fail and the survivors probably, at some juncture, had concerns about their own viability.  Failure to an entrepreneur means getting zero, bubkes, losing everything. To the average employee it means  several weeks or months of salary depending on length of service.

None of the corporate chieftains Forbes has recognized can pull off these shareholder heists alone. They need complicity. First of all there is the board of directors which, if not handpicked, is then at a minimum approved by the CEO. A subset of this august group is the compensation committee. Once they’re sharpened their pencils and put new batteries in their calculators, then they call up the compensation consulting firm. These guys specialize in designing incentives, long-term this, short-term that, stock options, retirement, supplemental retirement, non-qualified whatever. Blah, blah, blah, all part of the charade that must be acted out. At sunset the consultants produce a leather bound (if it’s not it should be for what it cost) treatise to justify the injustice of preparing the great king for induction to the highest-paid list.

The compensation committee, armed with this divine opinion, is safe from scrutiny. The shameless consultants can just pull their data base of all the other overpaid CEOs as their backup. The composition of most all boards’ of directors of S&P 100 companies goes something like this: CEOs of other big companies, retired CEOs of other big companies, and other. This “other” category includes a lot of talented, highly educated and successful people whose success was likely in fields that don’t pay a lot of money. Retired college professors, museum directors, retired politicians are examples.

Being on the board of an S&P 100 company may pay from $250,000 to $400,000 per year in cash, plus health insurance, and at least one board retreat with spouses for maybe 10 or 15 meetings per year. Good work if you can get it. A lot of these people may serve on two, three or more boards. Serving on a board or two is the difference between a ho-hum retirement and being able to easily put your grandkids through college and being able to comfortably travel the globe.  Do they have any incentive to make waves? I think not.

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