Companies Can Either Make Things Or Make CEOs Rich
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Making breakthroughs for consumers is hard, companies have found. But making fortunes for CEOs is easy.
Jeff Immelt, the CEO of General Electric since 2001, is retiring. The 61-year-old will be making a well-compensated exit.
Fortune magazine estimates that Immelt will walk off with nearly $211 million, on top of his regular annual pay. Immelt’s annual pay hasn’t been too shabby either. He pulled down $21.3 million last year, after $37.25 million in 2014.
But Immelt’s millions don’t come close to matching the haul that his predecessor Jack Welch collected. Welch’s annual compensation topped $144 million in 2000. He stepped down the next year with a retirement package valued at $417 million.
What did Immelt and Welch actually do to merit their super-sized rewards? What did they add to a GE hall of fame that already included breakthroughs like the first high-altitude jet engine (1949) and the first laser lights (1962)?
In simple truth, not much at all.
“We bring good things to life,” the GE ad slogan used to proudly pronounce. Not lately.
And not surprisingly either. Mature business enterprises, we’ve learned over recent decades, either make breakthroughs for consumers or grand fortunes for their top execs. They don’t do both.
Why not? Making breakthroughs, for starters, takes time. Enterprises have to invest in research, training, and nurturing high-performance teams.
Years can go by before any of these investments bear fruit. By that time, the executives who made the original investments might not even be around.
Grand fortunes, by contrast, can come quick. CEOs can downsize here, cut a merger there, then sit back and watch short-term quarterly earnings — and the value of their stock options — soar.
If those don’t do the trick, CEOs can always just slash worker pensions or R&D and put the resulting “savings” into dividends and “buybacks,” two slick corporate maneuvers that jack up company share prices and inflate executive paychecks.
On any CEO slickness scale, Jack Welch would have to rank right near the top. In 1981, his first year as the GE chief, Welch quickly realized he was never going to get fabulously rich making toasters and irons.
So Welch started selling off GE’s manufacturing assets. In his first two years, analyst Jeff Madrick notes, Welch “gutted or sold” businesses that employed 20 percent of GE’s workforce.
By 2000, Welch himself was making about 3,500 times the income of a typical American family.
By contrast, in 1975, Welch’s predecessor took home merely 36 times that year’s typical American family.
As Welch’s successor, Jeffrey Immelt would give an apology of sorts in a 2009 address at West Point. Corporate America, he told the corps of cadets, had wrongfully “tilted toward the quicker profits of financial services” at the expense of manufacturing and R&D, leaving America’s poorest 25 percent “poorer than they were 25 years ago.”
“Rewards became perverted,” Immelt went on. “The richest people made the most mistakes with the least accountability.”
Unfortunately, and sadly, Immelt never took his own analysis to heart. As a rich CEO in his own right, he continued to make mistakes and suffer no particular consequences.
One example: After the Great Recession, Immelt froze the GE worker pension system and offered workers a riskier, less generous 401(k). Within five years, notes the Institute for Policy Studies, the GE pension deficit widened from $18 billion to $23 billion — even as Immelt’s personal GE retirement assets were nearly doubling to $92 million.
“If we want to slow — or better yet, reverse — accelerating income inequality,” the Harvard business historian Nancy Koehn noted a few years ago, “the most powerful lever we have to pull is that of outrageous executive compensation.”
How many more outrageously compensated executives will retire off into lush sunsets, the Jeff Immelt story virtually begs us to ask, before we start yanking that lever?
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