Global Corporate Development – CEO Salaries and the (positive) impact of Outsourcing

In a 2006 article written by US Senator Jim Webb, he addressed an increasing disparity between salaries of CEOs and their employees, where CEO salaries top 400 x the amount of their average employee, vs 20 years ago when the difference was 20 x. Recently with the economic downturn, an even brighter light was focused on this issue as a result of failing financial institutions doling out rich and unjustified executive bonuses. Those of us who are not in the position of a major corporate CEO may view this disparity as a fundamental injustice. While there will always be richer and poorer in the world, the extremes of wealth and poverty can be problematic for a number of reasons, even though there are arguments which strive to justify these compensations.

But are they helpful or hurtful to global development?

Supporters of high compensation would argue that a good CEO can make billions for their company using their own experience and by hiring and consulting a qualified executive team. They embody the vision and passion for the company. They know when to sell outstanding shares in their company or unprofitable divisions to raise cash, and when to buy back shares to increase their value. They also know when to buy failing companies with good potential for pennies on the dollar, thereby taking advantage of floudering economies and improving poorly run businesses. And they outsource jobs in order to utilize a less expensive workforce and increase profits. Does this justify a 400 x salary? Obviously, those who have the voting power think so.

Dissenters argue that much of the success attributed to CEOs is more related to trends, like tides, that raise all boats. Certainly economic downturns would support this theory because just as all boats rise with the tide, many get grounded when the tide goes out.

In my personal experience as an Executive Coach, I can only say that I haven’t met a CEO I didn’t like. To be fair, most CEO’s I’ve met and worked with, while well compensated, probably don’t fit in the 400 x average salary category. Most are good people who care about the welfare of their workers, who care about their families, and who are relatively philanthropic in there outlook. And, of course, they have a responsiblity to earn profits for their shareholders, and they are justified in enjoying the fruits of their labours and experience. There are some CEOs that have taken a $1/year salary simply because they didn’t need more wealth and prefered to bestow those earnings on others in the company. There are those like Bill Gates (a former CEO) who have used their wealth to benefit others. But as in every facit of humanity, there are some CEOs who choose to exercise their best qualities, and others who choose to exercise negative qualities. Wealth is ultimately a test of one’s humanity and character.

In the same article, Senator Webb describes the loss of American jobs to outsourcing and illegal immigration as being a serious challenge. No one can dispute that loss of jobs and high unemployment in any country poses a problem for those who are affected. And his concern over the possibility of protectionism has been partly realized in recent US policy (the recent tariff on Chinese tires is an example).

Ironically, it is our limited and localized view of humanity which is both the source of the protectionist attitudes that Senator Webb warns against and the root of many global issues, including environmental challenges, foreign policy, international security, and extremes of poverty in the world.

One might pose the question, is it any more wrong that a CEO (putting into perspective that this is 1 individual per company) should earn 400x what an average American earns, than it is that an average American worker earn 50 x more than 3 billion people in the world who survive on less than $2.50 / day or less than $1000 /  year? The point here is not that there’s anything wrong with earning a reasonable living, rather that everyone deserves that same opportunity.

It is in this light that the obscenity of extreme CEO salaries which are 10,000 x the income of the majority of humanity become even more apparent, excepting where it is spent primarily to benefit others. It is also in this light that we need to re-think our global position on wealth distribution. Is it right that we casually accept abject poverty and hunger in the world simply because it exists outside our home boundaries? And it is in this light that we need to give credit to policy makers and business leaders who demonstrate their concern through enabling and encouraging global investment and even more so when it is done ethically and with concern for the environment and the local inhabitants rather than purely for profit-motivated reasons, even though there’s nothing wrong with a win-win scenario.

It is also in this light that I question concerns about outsourcing. Is it really a problem that jobs are created for people and economies where wealth is so desparately needed? It is, of course, a problem if you are an average American or Canadian who has lost their job and you need to pay for a home and to feed your family. Clearly, their are some who will need support through a period of global adjustment. But outsourcing is arguably good for the long term world situation. Giving jobs to poorer economies like China, India, Vietnam, Philipines, Russian, Malaysia, Indonesia and the many underdeveloped African nations, in the broader scheme, is nothing more than the market economy’s way of adjusting salaries on a global scale. True, just as in North America, there are some individuals who will suffer in the short term, and some who will take advantage and gather for themselves an inequitable share of the wealth through positions of power or inequitable pay practices. Yet the average salaries in these countries will continue to rise through outsourcing and global trade with the net result of creating new wealth and many new jobs. As the wealth of these countires and their average salaries continue to rise, so does the power of their workforce to spend on foreign products and services. And as the average salaries increase, outsourcing will become less attractive and jobs will return to where they are most profitable, ideally, where they are local and where transporation costs are lowest, all other things being equal. In this sense, I view outsourcing as a relatively short term trend that will have the long term implication of making everyone better off and limiting outsourcing only prolongs the inevitable pain of a world with major gaps in the distribution of wealth.

Current political systems are designed to address local problems first and global problems second. From this perspective, Senator Webb’s comments are thoughtful and show a great concern for the Amercan populus he is sworn to represent. His more recent role in international affairs and recent visit to Asia also demonstrate a concern for stability in the world. In a world that is ultimately so interconnected, we can only hope that more of our politicians begin to think globally first, then locally. It is only when decision making begins to take the form of addressing global policy first but informed by the multitude of local issues that we will start to make real progress on the larger issues of sustainability, world food production, climate change, and, ironically, gaining employment back at the local level.

In addition to solving some of the serious global inequities, the balance that will eventually be established through the current outsourcing trend will also resolve some of CEO salary issues. The huge profits earned through outsourcing to lower cost countries, will eventually becomes a thing of the past although this may take a few years.

As for CEO’s considering outsourcing, it all depends on  your time horizon and your need. We can already see Chinese companies building vehicles in the price range of about 1/2 the North American market, and India building a basic vehicle (the Tata Nano) at about 1/6th the cost of a small North American car. As these and other products become global, I suspect that global equalization of pay will become increasingly rapid. And as production continues to increase in developing countries, demand for energy will impact the cost of oil, thus further equalizing the cost of production in other countries and creating more opportunties for development of alternative energy sources.

If establishing your organization over the long term is your goal, you may wish to consider improving local productivity first, finding energy savings, and deploying new technologies and renewable energy sources such as solar and wind, assuring longer term cost reductions as an alternative to outsourcing to what will be an increasingly organized and expensive  labor pool.

Both approaches have their uses and their benefits.

Does investing in other countries make sense? Definitely, however, it should be done with the view in mind of first serving the country where the investment is made. If hiring local people for local production makes sense in North America, the same model should be anticipated in other countries.

I invite your comments, and positive additions.

All the best,
Garth Schmalenberg

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e-mail: Garth@hbi-leadership.com
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