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Tuesday, August 5, 2014

Cutting CEO pay: It's an act of compassion

Posted By on 08.05.14 at 07:00 AM

Some senators and corporate CEOs called for hiking the minimum wage earlier this year, but studies have found that the rich and powerful are typically less able to sympathize with others.
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  • Some senators and corporate CEOs called for hiking the minimum wage earlier this year, but studies have found that the rich and powerful are typically less able to sympathize with others.
An important new business principle is making itself felt: the more you pay your CEO, the more incompetent a job he'll do. I suppose powerful forces would like to stamp out this notion before it takes hold. But it's a fine, compassionate idea.

I learned about this from a couple of Canadian psychologists who published an op-ed in the New York Times the other day headlined "Powerful and Coldhearted."

"Studies have repeatedly shown," wrote Michael Inzlicht of the University of Toronto and Sukhvinder Obhi of McMaster University, "that participants who are in high positions of power (or who are temporarily induced to feel powerful) are less able to adopt the visual, cognitive or emotional perspective of other people, compared to participants who are powerless (or are made to feel so)."

The question was why. One idea passed along by Inzlicht and Obhi is that powerful people disregard their inferiors because they have nothing the powerful need. But the writers favor an alternative explanation: "We contend that when people experience power, their brains fundamentally change how sensitive they are to the actions of others."

"The human brain can be exquisitely attuned to other people," they went on. But their own research had shown them that the more powerful a person feels, the less attuned his or her brain will be. "The powerful are, by default and at a neurological level, simply not motivated to care."

The op-ed didn't get into salaries, but we can speculate that the more an executive is paid, the more powerful he or she feels. This is an assumption of "CEO Narcissism and Corporate Tax Policies," a new paper that correlates narcissism with reckless tax avoidance—i.e., with the kind of behavior that can bring companies down.

"Our narcissism measure," explain the authors, Kari Joseph Olsen of USC and James Stekelberg of the University of Arizona, "is a composite index based on the CEO’s relative cash and non-cash pay in addition to the prominence of the CEO’s photograph in the firm’s annual report."

If the CEO's piercing visage hogs a whole page of the report, and he pays himself more than the COO and CFO make together, the firm's in trouble.

Forbes.com contributor Elizabeth MacBride just wrote a piece recalling her 1992 interview with Harold McInnis, who at that time ran AMP, a big Pennsylvania manufacturer of electrical connectors. McMinnis had pledged that he would never allow himself to be paid more than 14 times as much as AMP's lowest-paid worker. "He thought too much money ruined CEOs, like too much alcohol or any other kind of drug," MacBride told us. If McInnis was right, MacBride hinted, American business is in crisis: last year, she reported, "the median pay package for CEOs was about 257 times the average worker's salary, up from 181 times in 2009."

MacBride went on, "McInnis probably gleaned his insight from observation and self awareness, but new research into the way our brains work supports his idea." She cited research by behaviorist Jeffrey Pfeffer of the Stanford Graduate School of Business, who with two colleagues wrote the paper "When Does Money Make Money More Important?" The intriguing answer: when you think you've earned it on your merits, in which case continuing to feel meritorious depends on continuing to earn it, and the more the better.

"No one wants to be paid below the median because everybody thinks they are above average," says Pfeffer. "There's a compensation rat race going on, but the centerpiece of the story is that the more money people get, the more salient that money becomes."

His solution to this addiction to money for ego's sake? "Tax it," says Pfeffer. "That's what public policy has done in the past to restrict the use of legal drugs like alcohol and nicotine—we tax them." Tax huge compensation packages at a rate so high CEOs stop demanding them—and don't let the rank and file get hung up on salaries either. When money "becomes equivalent to the love of the organization," says Pfeffer, no salary is ever enough.

"Companies should try to find other ways to signal competence and worthiness to their employees," he says; and of course forward-looking enterprises have responded by expressing gratitude with perks such as Skee-Ball and free corn flakes in the snack bar.

The argument that the high and mighty are soul dead is not brand-new: Here’s a 2010 New York Times story surveying then-recent research into the "empathy deficits" of the upper-class. Privilege doesn't make for a "sympathetic boss," said the article, but the toll privilege takes doesn't stop there. The story described big shots struggling to read the emotions of strangers, struggling with underdeveloped social skills—the ones that make other people like having you around. The story reminded me of a victim of Asperger's syndrome I once knew, a fine man who couldn't say the right thing at the right time if his life depended on it.

And concern that CEO's are being paid too much money is certainly not new. What seems novel is the way this concern is now being framed as a mental health issue. Strictly out of compassion for the CEO, mind you, the board of directors should cut his wages in two. Out of equal compassion, the labor union should insist its members make at least one-fourteenth as much as he does.

And if the rank and file choose to storm into the executive suite waving sabers? It's not an insurrection—it's an intervention.

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