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  • Value, Fairness and CEO Pay

    Published on Monday, July 15, 2013

    What do they do with all that money? This is the question I was asked the other night by a colleague. It’s a question I am often asked just after the latest CEO pay reports have hit the newsstands – and especially by people who work in management consulting outside the United States. It’s a question I often ask myself as well – what could anyone do with all that money?

    What is money?

    Many years ago I became curious about the concept of money and the institutions that surround it so began a wide-ranging research project to seek answers to some of my questions. My findings came down to a few key points.

    First, conceptually money is a representation of value. The paper product or coin itself has little to no value outside of what it is supposed to represent.

    Second, money is supposed to actually represent something of value – that is, an object classified as money is supposed to directly translate into some tangible action, creation or accomplishment that the holder of the money has produced.

    Third, throughout most of time in most societies, money was meant to be circulated. Given that money represented the value of actions and contributions, the only way for a society to create more value was if money and what it represented continuously moved throughout the society. This becomes clear only when we remind ourselves of the reality that money itself is not what has value – it is a representation of the value that actually exists in something else, something that has actual value to a person, family, community or society.

    There’s more that I learned from my research project, yet these three basic points gave me a place to start. And then of course I started thinking about what this might mean for the place of money in our society.

    Money and Value

    If money is a representation of value then there are perhaps other things that could also represent value in similar ways. This is quite evident in recent efforts to start alternative payment systems – such as community dollars, scrip programs and barter systems.

    The representation of value is clear in these systems, it is tangible, not just conceptual.  Community dollars and scrip do represent the value symbolically – as a piece of paper linked to an action - while direct barter links one action of value directly to the one it is being exchanged for. Yet for both scrip and community dollars the action linked to the piece of paper is often quite visible, a local or recent action that has enabled someone to receive the scrip or community dollar.

    When value is embedded in the work, service or product you are willing to exchange for the work, service or product of someone else, then the money that you received for your actions should be able to represent that value as well.  So your money should represent to you the value of your work/service/product, your contributions, and your actions. And when you spend your money you are letting go of some of the value you created and honoring the value that someone else created. You exchange your value for someone else's.

    If you have saved money for a while by basically saving the accumulated value of your actions, then you can exchange that value for a large amount of work, service or product – for example a bicycle, a car, a home – that you believe represents a fair exchange. If we think about it, this is what we all hope for in exchanges – that the value that I give to someone else for their work, service or product is of comparable value to the efforts I put in to producing the money I have available to exchange.

    Fairness and Exchange

    Fairness is a concept that is very important to human beings and to functioning societies. Babies and young children instinctively respond to situations in which fairness and unfairness are present, implying that at a very young age, humans exhibit social behaviors linked to the fair distribution of resources.

    As we age our understanding and practice of fairness shifts from one based often on egalitarianism – everyone should get the same amount of milk and number of crackers after nap time – to one based on meritocracy. In a meritocratic system we believe that it is fair that people who have expended significant effort to create value will receive comparable value in return. Yet in a meritocratic system the value of one person’s work is always determined relative to the value of other people’s work. Theoretically at least, the value of every individual’s work is thus relative to the value of every individual’s work – it’s a system that has found a way to stay in balance.

    Taking this back to money, this means that people who work harder, contributing more to the system of production, will receive more money in return for their efforts. But it all needs to fit within the same system in order for us as human beings to see merit in the process – we look for fairness.

    Pay Equity and Fairness

    Which gets us right back to questions about CEO and senior executive pay. First, is it fair, and second, what do they do with all that money? The fairness question is I believe a fundamental question we ask as human beings. Because we are social animals and recognize (when we stop to consider) that our survival depends on collaboration and cooperation, the notion of fairness comes up in our assessment of the systems that dominate our social lives.

    Pay equity is a fairness issue specifically because it goes to the heart of how we organize and support ourselves as human beings. Equity in a system means that there is a direct link between the value associated with one person’s actions and the value associated with another person’s actions. Often discussions about pay equity get sidetracked by a focus on numbers when fundamentally the discussion is about fairness. When CEO pay becomes a target of complaints and criticism it is, at its core, a complaint about a system that people perceive to be unfair.

    The question of what people do with all that money is tied back to the fairness question yet rests more deeply in an exploration of the value of people’s contributions. Sometimes people joke about what they would do if they had all that money, and some people support excessive CEO and senior executive pay packages because they fantasize that maybe someday they’ll be a CEO and get all that money. Yet is it really money they are thinking about – or is it value?

    Pay and Value

    The question of value and CEO pay takes my mind on two paths that link fairness and value with money – one has to do with a CEO’s ability to exchange her pay for other things of value and the other has to do with how a CEO himself thinks about his own value relative to all that money received.

    If a CEO is paid a lot of money for her work and she then spends that money on other things – a new car, a house, a vacation – she is exchanging the value of her work for the value of someone else’s work that produced the car, house or education. Yet what if she has so much money that she buys 3 cars and 4 houses, and her vacation is on a yacht that she rented and then decided to buy because she had enough extra money that she could do that. All of a sudden the question of the exchange value of work and money gets confounded.

    There are two dilemmas that arise for most people here. First, is the work of the CEO really that valuable that she should be able to buy 3 cars, 4 houses and a yacht (or whatever excess level of consumption beyond need you want to include here), when the exchange value of another person’s work can barely enable them to rent an apartment and take the bus? In a meritocratic system the value of the CEOs work will be recognized by higher levels of compensation than the work of others – yet there will be some level of relative value that exists in order for the system to be seen as meritocratic. 

    It is this issue of relativity that many believe has been lost with the skyrocketing inequality that exists between the pay of CEO’s and senior executives and the pay of all other workers. These other workers contribute to the creation of the goods and services that are used to justify the value (pay package) provided to the CEO – yet their contributions are valued at a much lower rate than the value accorded to the CEO’s contributions. Thus the fairness question comes into play.

    The second path I consider has to do with what someone receiving all that money must think about himself relative to all the other working people in the world who receive so much less value for their efforts. Do they see themselves as that uniquely valuable to the world or do they not think about it at all?  And if they see themselves as that uniquely valuable to the world do they see their value as something that comes from themselves alone, thus justifying an amount of compensation that many see as beyond excessive?

    I know that there are many CEOs and senior leaders who redistribute or share significant amounts of the value they receive in compensation through philanthropic and humanitarian activities. Many do so quietly, while some people’s efforts are well known, and these efforts bring much good to the world. Yet most studies of philanthropic activity indicate that it is actually the people with the fewest resources who give proportionally more of what they have to help others. So philanthropic generosity is not unique to those with lots of money and does not assuage the concerns of people looking at pay inequality. While there are many individuals with lots of money who share generously, there are many, many more who do not share as much as they could.

    Realtivity and Fairness

    Regardless how much people share though we still get back to the basic questions that arise around CEO pay, and these questions have to do with fairness and value. Is it fair for one person to receive so much more money for the value of his or her work than everyone else does.

    And if one person does receive more value for their work, what does it say about the relative value of other people’s work? If a CEO’s contributions are, year over year, valued at 200 to 400 times more than that of the average person in his organization is the CEO really that magnificent or are the other people really just not that important at all? What message is the compensation committee of the Board of Directors sending to all the people who work so hard to produce value for the company?

    These are simple, fundamental questions that go to the heart of who we are and how we live as human beings. Extreme inequality is devastating to societies. What are you doing to change the inequalities that might be present in your organization?

     

     

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