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When You’re in the Club


‘How much money would you like to earn this year?”

I’ve seen and heard this question before. E-mail solicitations. Classified ads in the “Business Opportunities” section. One evening years ago, my wife and I were socializing with a couple we had recently met, who, we thought, were just looking to meet people with similar interests and make new friends. The conversation was pleasant and innocuous for a while, until the man leaned forward, his face turning all serious and purposeful. “How much would you like to earn this year?” he intoned. Turns out, they were cogs in a pyramid scheme, recruiting people to sell mail-order household products.

The point is, I’m wary of “name your income” schemes that don’t fall within the realm of standard contracts and salary/wage agreements. One can always negotiate those, but let’s face it, the vast majority of us are negotiating within a relatively small window of possibility as dictated by the market we live in, the field we work in and the skills and experience we bring to the job. And when compensation is determined in part by performance, well, you’ve gotta perform. If you are a salesperson and your target is to sell $75,000 in the third quarter, and you sell only $50,000, your boss isn’t going to say, “Hell, take the commission on the extra $25,000 anyway.” It just doesn’t work that way.

Unless. . . . you’re in the club.

In a June 1 article titled “Big Bonuses Still Flow, Even if Bosses Miss Goals,” The New York Times detailed the latest twist in a general phenomenon that’s becoming all-too familiar: Not only do top American corporate executives make enormous sums of money (and still more compared to rank-and-file workers than anywhere else in the world, although Europe and Japan are trying to emulate us); not only are top U.S. execs rewarded with lavish raises and bonuses even when the company underperforms and shareholder value diminishes; now, the Times reports, investors who take the time to plow through company filings are finding more and more cases where executives whose pay is tied by contract to specific performance goals are getting the extra pay whether the goals are met or not.

Shareholders (and most of the rest of us ordinary folks) are understandably livid when they find out that bosses are being paid bonuses they’re not supposed to get when share prices are dropping. But as a few high-profile corporate-fraud cases have made all too clear, even many in the so-called investing class are considered expendable to the people at the top. Many typical middle- and upper-middle-class investors may live relatively comfortable lives, but that doesn’t mean they’re in the club.

Besides being angry, many people are genuinely puzzled that executives are getting raises and bonuses that are supposed to be performance-based when the company is actually losing value. Why would the boards of directors who run the companies and the compensation committees who determine executive pay do things that are not in the companies’ best interest? Well, maybe they don’t have the companies’ best interests in mind. Maybe they have each other’s best interests in mind.

To begin to understand how this might be so, think about power structures at almost any level, and how people who hold power often look out for their perceived peers (and of course, their friends and family). Notice how the crony who is forced to resign from his cushy patronage job winds up in another equally cushy job. Remember the rich kid who got into trouble and got kicked out of Choate? He went to Exeter. Incompetent or otherwise undeserving people with good connections tend to fail sideways, if not upward. In fact, I can think of a really good example of an incompetent person who has failed to the top, if you know what I mean.

But connections are only part of the story, albeit a big part. The other part involves the psychology and sociology of decision-making at the top; the psychology and sociology of the club. If you spend any time around super-rich people who also happen to be greedy and not particularly charitable toward the less-well-off (and it’s important to note that not all rich people are like this), one thing that will strike you is how deeply they believe they deserve everything they have. And they are loath to allow any misfortune or inconvenience take any of it away. Around the time I taught at a very wealthy private high school, I read that the secret to wielding power is learning to make decisions—even ones that might harm other people—without remorse. At that school and elsewhere, I have seen that credo at work.

The sociology comes in when people of this class get together to make decisions—say, when the compensation committee meets to set the CEO’s pay. There are a number of factors at work here (see research on the subject by Charles O’Reilly of the Stanford Graduate School of Business), but suffice it to say that they mostly tend to favor a huge pay package. For one thing, the committee members are likely all of similar class, status and income, and will see the executive as equally deserving, more so if they perceive him of higher social status. For another, the committee members and the executives whose pay they are setting may be connected in interesting ways—anything from prep-school buddies to the possibility that the CEO himself appointed them to the board.

If you want an extreme example of the behavior traits of members of the club, look no further than the late Enron CEO Ken Lay, who presided over the largest corporate fraud in U.S. history. Not only did he approve of schemes that ultimately cost his shareholders and employees millions; not only did he defraud California residents by manipulating prices during their energy crisis; not only did he profit handsomely from all of this. In his final stand, Kenny Boy told the court he had done nothing wrong. Talk about wielding power without remorse.

I have heard the theories, and I have no opinion, because any of them could be true: He died naturally, he committed suicide, he’s on an island somewhere. But in his (apparent) death, Ken Lay has made one last gift to his family: They likely will not have the family fortune taken away. How much money will they get this year, and every year for the rest of their lives? I don’t want to know.

—Stephen Leon

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