Please Buy More Stuff

Originally published May 18, 2008

Please Buy More Stuff

Well it’s looking more and more like my TTU colleagues and I will be receiving pay cuts this year. Our salaries aren’t decreasing, but the cost of living is going up and our salaries are staying the same. The net effect is that we lose buying power and we effectively receive a cut in pay.

So why are we receiving pay cuts? Did we do our jobs poorly last year? I don’t think so. We manufactured more student credit hours than ever before. We produced more degrees than ever before. And we attracted the largest freshman class ever.

We’re receiving pay cuts because the citizens of Tennessee aren’t buying enough stuff.

At TTU, we mainly receive raises when the state’s elected officials find enough extra money in the budget for us. In Tennessee, of course, the state’s revenue comes primarily from the sales tax. So I receive a raise when Tennesseans buy more stuff.
I’m not going to propose a solution to the state’s budget problems, but I think this is a pretty good example of the difficulty organizations have when it comes to compensation. Most organizations are not very good at using compensation to pursue organizational goals.

The problem is not limited to state governments. The news is full of companies where pay is not aligned with organizational performance.

In 2007, for example, Citigroup’s stock lost about half of its value and the company’s losses from the credit mess are approaching $40 billion.
Citigroup’s CEO, Charles Prince, “retired” in November of 2007 when the losses began piling up. He left with a severance package worth $40 million. He will also receive an office, secretary, car and driver for the next five years. Perhaps Prince will hire one of the 30,000 Citigroup employees who are being laid off because of his “leadership.”

Countrywide’s CEO, Angelo Mozilo, cashed out $400 million in stock options when the stock was doing well between 2003 and 2007. Mozilo’s options were awarded based on the company’s earnings. The company’s earnings, of course, were built on selling increasingly risky loans.

Now that the house of cards has collapsed and the stock price has fallen by 90 percent, Mozilo is doing pretty well while stockholders, employees, and customers are suffering.

Oddly enough, Mozilo was on the board of directors at Home Depot when their CEO, Bob Nardelli, was ousted because of the company’s poor performance. Nardelli left with a package worth $210 million.

And therein lies the problem with CEO compensation. CEO pay is determined by the board of directors. The board is supposed to act in the best interest of the shareholders. But most board members are selected in ways that guarantee CEO-friendly boards.

Most boards have adopted some form of performance-based pay for the CEOs, but their performance goals are either too easy to meet or actually counterproductive to the long-term health of the organization.

I’m the last one in the world that wants any sort of government regulation of CEO pay, but presidential candidates are proposing this very idea. The CEOs are bringing it on themselves.

All organizational leaders need to understand the kinds of things that foster the long-term health of the organization. Then they need to pay people for doing those things.

Until we learn that lesson, please buy more stuff.