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The Negative Impact of CEO Pay and Power on Corporate Culture and Governance

The Negative Impact of CEO Pay and Power on Corporate Culture and Governance

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Published by ddith1
Many top paid CEOs make more in two days than the average person makes in a year. Some think this is bad; some think there is nothing wrong with that.
Many top paid CEOs make more in two days than the average person makes in a year. Some think this is bad; some think there is nothing wrong with that.

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Published by: ddith1 on Jan 30, 2012
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10/09/2012

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 ==== ====For More Details visit:http://DownloadFreeInfo.com ==== ====A recent study conducted by Economic Times of India showed that in 2009-2010 fiscal year,CEOs of top companies earned 68 times the average pay of employees. This has increasedaround 9 times in just one year. In 2008-2009 fiscal year, CEOs earned 59 times the average payof employees. Naveen Jindal, Managing Director and Executive Vice-Chairman of Jindal Steel &Power has the dubious honor of receiving the highest salary in India. He earned Rs. 48.98 crores(USD 10.75 million), an income 2000 times the average salary of employees of his company. Similar studies of top executives' income in UK and US have shown extreme disparity of income.In US and UK top executives pay is 263 and 115 times the average worker salary respectively.After the financial crises, US and UK governments are working on curtailing CEO salaries. Is theastronomical increase in CEO salary a good trend for India? If not, what are the negative impacts? Psychology of CEO's and Top ExecutivesIn the present society, a CXO designation commands respect. A common person attributes aCXO's success to attitude, skill, intelligence and brilliance. The automatic assumption is that CXOsare better human beings than an average person. Are these assumptions right, does power andmoney make a human being better? A research paper titled "When Executives Rake in Millions: Meanness in Organizations" discussesthe impact of high executive pay. The research shows that high executive pay brings out the meannature of top executives. It states, "Higher income inequality between executives and ordinaryworkers results in executives perceiving themselves as being all-powerful and this perception ofpower leads them to maltreat rank and file workers." This sounds terrible. Is human nature suchthat more successful a person is, the less likely he/she is going to be compassionate andempathic to others? The study indicates that some powerful people perceive those with lesser power as sub-human.Such a person feels reduced empathy, has lesser understanding of emotions and feelings ofothers, is inclined to objectify and dehumanize others, and sexually harass and degrade workersin lower positions. This person becomes morally disengaged; and tends towards unethical andcorrupt behavior. An article published by The Economist titled "The psychology of power: Absolutely" states thewell-known, power tends to corrupt people. Secondly, it states that powerful people are full ofhypocrisy. They expect others to behave better, and do not hold their own behavior and actions tosimilar high standards. On the other hand, they conceive they are entitled to abuse others andbreak the law. Powerful people disregard law since they consider themselves privileged andbelieve different rules apply to them. These studies force me to think - does one have to pay theprice of power by losing one's humanity?
 
 There is a reverse rationalization here. When CXOs consider their juniors as less human, thepsychology of use and discard sets in. CXOs believe they can deny the employees basic humanrights and dignity. Hence, the false sense of superiority of CXOs makes them insensitive to juniors'pain resulting from their actions. Hence, CXOs terminate employees, deny decent workingconditions and harass employees without any sense of remorse. This is illustrated by the fact thatCEOs who fired the maximum number of employees during recession in US, received the biggestpay packets. A CXOs false sense of entitlement makes them happy about the disparities. Apsychologically normal person would feel guilty at benefitting from another humans tragedy. In my view, majority of the CXOs are of boomer generation and the probability of Gen X & Y beinga CXO is low. Gen X & Y is more likely to be in the lower ranks. Hence, should we consider itdestined that boomers will mistreat Gen X and Gen X will mistreat Gen Y. Each generation as theyage will become more inhuman towards others. This raises a number of social issues. As we haveseen in the last two decades in US, CXOs salaries have increased around 300%. As the socialand psychological consequences of income disparity are borne by the society, this is a bigconcern for India. Impact on Corporate Culture & GovernanceJeff Skilling, Kenneth Lay, Bernie Ebbers and Bernard Madoff are examples of the CEOpsychology gone wrong. From heroes they became villains. Their moral disengagement causedthem to break the law without considering the legal consequences of their actions. Theirnarcissistic sense of entitlement and superiority damaged the corporate culture significantly. Thisbehavior was even transmitted in personal relationships. In an interview, Madoff's sons had said,"he never thought us as good enough." A man responsible for stealing billions held his own sonsin contempt. The question that comes up is why do the employees agree and cater to this false sense ofentitlement? Why do they not break the grandiose self-image of the CXO and make him/her seereality? When employees see the power and sense of entitlement of the CXO, they start believing it to bethe truth. Employees concede that the CXO is superior, group consensus and thinking developson those lines, and the CXO behavior becomes socially acceptable. It is a vicious cycle, whenCXOs see employees accepting their negative behavior and attitude, they start believing that theyare all powerful and superior human beings. Hence, the whole organization is caught in a psychictrap. Disconnect with reality results in a harmful organization culture and deteriorating corporategovernance norms. CXOs select employees to bully, harass and humiliate to demonstrate theirpower. The employee's incapability to fight back caters to the CXOs egos, and they furtherdegrade employees. The other employees from fear of being chosen for same inhuman treatmentkeep quiet and cater to the CXOs ego. The seeds sown by this behavior grow into a destructiveorganization culture. The study titled "The CEO Pay Slice" shows that there is negative correlation between high CEOpays and profitability of the organization. In comparison to the competitors, companies havinghigher pay for CEOs showed lower profitability for investors. CEOs with higher pay do not
 
automatically perform better. Results indicate that they make worse acquisition decisions andshow weaker accountability for poor performance than other CEOs. Sometimes CEOcompensation increases when industry and economic factors are favorable. Hence, the increasein pay maybe attributed to luck instead of better decisions and performance. This does not augur well for the risk managers in the organization. CXOs with a false sense ofprivileged status are more likely to disregard business ethics and laws while making decisions.Hence, the organization is at a high risk for legal cases and reputation damage. In the long run,the lack of focus on organization culture and governance may cause major corporate disasters. RecommendationsThe CEO and top executives set the tone at the top. If they are morally disengaged anddisconnected from employees, the organization faces some severe challenges. Hence, somesolutions are required to address this problem. Here are my recommendations: i) The Indian Company Law Schedule XIII defines the method of calculation and limits ofmanagerial remuneration. In my view, the calculation should involve number of times the averagesalary of workers. This will ensure that some balance is maintained between board, CXO andworkers pay. ii) Studies have shown that some powerful people tend to hold themselves at higher standardsand are lenient to others misdemeanors. Studies on emotional intelligence indicate thatemotionally intelligent people are aware of their own and others emotions and drivers. This mightsound bizarre, but maybe we should explore methods to keep CXOs emotionally connected. iii) The research paper reflected that women are less likely to feel a sense of entitlement or powerif they can be mean to a less powerful person. It is a good idea to keep more women as CXOs tomaintain a balance and keep senior management grounded. iv) Corporate governance norms should include independent board members in compensationcommittee. This will ensure that a realistic view is taken of CEO and other top executives' salary.Basing salary structures on performance rather than favorable circumstances is required. v) Employees may be empowered by forming trade unions and using whistle blowing lines insideand outside the organization. vi) Last but not the least, public should play an active role in curtailing income disparities. Theissues should be brought to government and media attention. References (visit my blog to see the links): CEOs of Top Companies Earn 68 Times of Average EmployeeWhen Executives Rake in Millions: Meanness in Organizations {Authored by Sheeshadri Desai(Harvard University), Arthur Brief (University of Utah), Jennifer George (Rice University)}The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs PeyerThe Psychology of Power - The Economist 

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