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Posted by Paul Michelman on October 9, 2007 5:00 PM
The average total pay for CEOs in the S&P 500 last year was about twice as much as the next most highly paid executive, according to a new study conducted by the Financial Times .
The gap between number ones and twos was as high as ten times (in the case of Sallie Mae CEO Thomas Fitzpatrick) and more than four times in 30 of the world's biggest companies.
As anyone who follows CEO compensation is well aware, the pay chasm between CEOs and their top lieutenants is not new. Indeed, some -- including Harvard Business School professor Rakesh Khurana -- have been questioning the practice for years. The traditional defense of stratospheric pay for top executives has been that the market sets the price. But Khurana says the idea that CEO compensation is driven by the invisible hand of market forces is a myth from which chief executives have long benefited.
But the questions remains: What spurs on this widening gap between the pay of CEOs and other top executives? And do the risks, responsibilities, and relatively short tenures of CEOs justify it? Consider the ideas in the posts and articles listed below and then post a comment with your point of view.
Posted by Scott Anthony on October 9, 2007 2:49 PM
Scott Anthony is president of the innovation consulting firm Innosight. His full bio and bibliography can be found at http://www.innosight.com/anthony.htm.
Long before Apple entered the mobile phone market with the iPhone, Silicon Valley had been buzzing about a potential mobile play by search titan Google. Now that Google’s mobile phone strategy is coming into focus, fans of disruptive innovation are likely to be quite disappointed.
Google, of course, has been on a disruptive tear. Its novel business model has transformed the Internet advertising market and siphoned value away from established media companies. In the last couple of years, it has begun to experiment with radio, print and video advertising. It was only a matter of time before Google focused on the emerging market for advertising on mobile phones.
We believe the mobile industry is ripe for disruption. Voice services show signs of commoditizing. High-end data applications like video aren’t getting mass uptake. Even with expensive penalties for early termination, consumers frequently switch carriers.
Google’s approach doesn’t seem to rise to the opportunity. According to a New York Times article, Google hopes to persuade carriers and phone manufacturers to include a Google-created operating system on their handsets. The open source system will compete against proprietary systems offered by companies like Microsoft. That system could make it easier for Google to ultimately place ads on mobile phones. Google’s bet is that this system, combined with Google applications specifically created for mobile phones, could shift control from carriers to Google.
Disruption happens when a company entering an existing market follows an approach that looks unattractive to the market leaders. In this circumstance, the opposite is true: Carriers have already placed big bets in the anticipation of earning service revenues from advertising and other future applications, which appears to be Google's plan as well. These carriers would seem to have strong incentives to keep Google and -- the competitive threat it presents -- at arm's length.
While Google’s approach might be a reasonable stepping stone for the company to learn more about the mobile industry, a far more interesting approach would be for Google to become a mobile operator, offering free, advertising-supported handsets.
In fact, Blyk in Europe is already attempting this approach, offering a free service supported by advertising. This strategy has all the hallmarks of disruption—a highly differentiated business model that looks unattractive to the industry leaders whose business models are based on charging fees for minutes of use and data access. Given Google has been buying up wireless spectrum, it might yet have a similarly disruptive card up its sleeve.
Google has the resources and creativity to power disruption in the mobile phone industry. It might still realize that opportunity, but the first version of its strategy appears pretty blasé.
How do you build a brand on the Web? It’s vastly more difficult than it ever was in the age of mass media. Television loved brands. On the Web, users aren’t as easy to impress. Marketers are interlopers on MySpace, Facebook and YouTube, the social media sites where people go in the millions day and night to share video, to network, to exchange reviews and to express themselves. In social media, marketers are more likely to be met with counterargument, parody, invective, and reproach than the numbed acquiescence they are accustomed to receiving from prime-time TV audiences.
But some brands are cracking the code of social media and discovering how to thrive in the disenchanted environment of Web 2.0. Consider Unilever’s Dove, which has added $1.2 billion to its brand value over the past three years, according to Landor Associates, and won the double Grand Prix at Cannes in 2007.
The principle made plain by Dove’s success is that in social networks brands must seek to provoke conversation not to dominate it. The locus of control in the marketplace shifts from marketer to consumer, and success is built on a model of co-created meaning. In Web 2.0, marketers accept that it is enough to rouse, to stimulate, to stir.
Dove's strategy was to move away from functional claims and to present itself as a brand with a point of view. It advocated that the beauty industry was contributing to the destruction of self-esteem in girls and young women by propagating unrealistic standards. With its Self-Esteem Fund and The Campaign for Real Beauty, Dove placed itself at odds with its competitors. Consumers loved the conflict. They lit up the digital media, generating millions of pass-along clips for YouTube, clips like Evolution and Hates Her Freckles.
They went further: some generated parody clips and some gave voice to frank skepticism about Unilever’s motives. A marketing commentator called Dove a brand out of control, and a columnist for the online magazine Slate, wrote, “Talk about real beauty all you want—once you're the brand for fat girls, you're toast.” But Slate was writing for a time gone by, and in the world of social media it seemed that ceding control over message to your consumers was well rewarded.
Early in the Internet era, it looked as if successful online marketing would follow the model of direct marketing. Data profiling and digital media would allow for deeper targeting and more intrusion into consumers’ lives than broadcast marketing. At last, it seemed, marketing would become a branch of social engineering with the marketer firmly in control. Ten years later that view looks to have been quite wrong. What we did not anticipate was that the technology that enabled intrusion would also enable defense against intrusion. From Tivo to Caller ID to social media, consumers have found ways to keep the invaders at bay. Marketers no longer rule the market. They are invited guests. If they are provocative, pertinent and entertaining they get to stay. If they are overbearing there are ways to shut them out.
In this month’s Harvard Business Review, we present an unusual and inspiring story of leadership. While it comes from far afield of the traditional world of business, it contains rich lessons for all leaders.
Rory Stewart’s tale of is one of adaptive leadership, applied shrewdly and with great resourcefulness. As an administrator stationed in post-invasion southern Iraq, he honed his management skills amidst a violent stew of ethnic, tribal and political factions exploiting a time of chaos.
The 34-year-old Scot was working for the Coalition Provisional Authority. His mandate: to negotiate among the cast of diverse combatants and produce positive results -- create jobs, rebuild schools and marketplaces, sow the seeds for democratic institutions. Working to achieve those ends he learned to be a master of flexibility, manipulation, and improvisation -- willing to cut deals to make things happen, but always, in the best Machiavellian tradition, keeping his eye on the prize. It was, perhaps, the ultimate learn-on-the-job experience.
But Stewart’s experiences in the region were not limited to managing in the midst of chaos. Prior to his government stint, he spent a year-and-a-half walking 6,000 miles across Central Asia, as he recently told The Wall Street Journal, “to get out of secondhand experiences,” and to see, touch, and feel this part of the world for himself. Stewart's epic walk provided him with valuable insights into Islamic cultures and the Iraqi character.
Taken together, Stewart’s experiences comprise an inspiring leadership curriculum – the extreme-sports version of an MBA. His resume suggests that crucibles can be the equal of classrooms for conveying the lessons a leader must learn.
Posted by Gardiner Morse on October 3, 2007 8:34 AM
What are companies to make of the news in late September that two environmental groups, along with state and city financial officers, had petitioned the US Securities and Exchange Commission to require companies to reveal their financial exposure to climate change risks? On the one hand, it’s doubtful the petition will be adopted (writing in the New York Times, Joe Nocera put the chance in the ballpark of “Zero. Zilch. None.”); on the other, you’d have to be living under a rock not to appreciate that investors, regulators, and the public are getting aggressively curious about companies’ carbon footprints. In Europe, companies’ greenhouse gas emissions are already capped; whatever becomes of this petition, it’s surely just a matter of time before all companies’ emissions will be measured, regulated, and priced.
That fact alone is a good reason for companies to be getting ahead of the curve on measuring and mitigating their own emissions; and many companies have shrewdly undertaken green initiatives as part of their overall corporate social responsibility (CSR) activities. But risk management and CSR shouldn’t be the main events when it comes to carbon. As Harvard Business School’s Michael Porter and Forest Reinhardt argue in Harvard Business Review this month, many companies that think strategically about their carbon exposure will find sources of sustainable competitive advantage. Business leaders, they write, need to approach global warming in the same hardheaded manner as any other strategic threat or opportunity. Reducing emissions as part of corporate strategy, of course, is an opportunity to do good on a global scale. But as Al Gore remarked when he spoke at Harvard Business School in December, addressing climate change also represents one of the biggest business opportunities in history.
In the October issue's Harvard Business Review Forethought section, several leading thinkers in business and academia provide a hard-nosed look at this tough new environment.
How is your company thinking strategically about climate change?
Posted by Julia Kirby on October 22, 2007 10:42 AM
Do customers care where brand-name goods are made? Assuming, that is, that quality standards are maintained and the means of manufacture aren’t exploitative, does it make a difference to them whether a product is assembled in Milan or Malaysia?
Sometimes it does. Consider a quirky example from Chicago, where a management team was caught off guard by an intense public reaction. Marshall Fields, an icon of Midwestern retailing, had the longtime practice of making chocolates on the 13th floor of its flagship store on State Street. Customers devoted to Frango mints could pop up to see them being made. When a new corporate parent, Dayton Hudson, acquired Marshall Fields in 1999, it was a straightforward decision to end that practice – everything about it was un-economic – and outsource production to a distant chocolatier. The public outcry was way out of proportion to the number of jobs affected. Chicagoans seemed to take the matter personally, even to the extent that Mayor Richard Daley put his disapproval on record.
Business writers have fallen in love with the word “authenticity” lately – so much so that it’s beginning to ring false. Yet it does seem like that’s at the heart of such incidents. We sensed it again when Latrobe, Pennsylvania lost Rolling Rock beer. And when Burberry shuttered one of its last British production facilities, a shirt factory in Wales, earlier this year. For at least some brands – perhaps luxury brands most of all – customers connect their sense of what constitutes “the real thing” with a very specific geography. And when the brand decamps, the damage cuts both ways. The brand loses equity by being cut loose from its heritage. And the community it sprang from feels a part of its own identity ripped away.
This is the territory we’re exploring in this month’s HBR case study, “Mad About Plaid.” And as always with the case study, we are hoping to generate a dialogue. In any decision to outsource and offshore production, it’s expected that management will mitigate the impact on workers. But is it also an issue for customers? What do you think a brand risks when it pulls up stakes?
We'll review every submission and post those that are particularly useful. You'll also be able to compare your perspective with the experts' after we post their commentaries on October 26th.
Radiohead's Disruptive Innovation
Posted by Scott Anthony on October 10, 2007 6:28 PM
Scott Anthony is president of the innovation consulting firm Innosight. His full bio and bibliography can be found at http://www.innosight.com/anthony.htm.
The public perception is that it’s a rough time to be in the music industry. That’s true – if you are a traditional music label facing disruption on multiple fronts. If you are an artist, however, it is the beginning of a golden age of direct connection with fans and new monetization models.
The latest disruptive development is supergroup Radiohead’s novel mechanism to distribute its latest album. Instead of distributing In Rainbowsthrough traditional mechanisms, Radiohead allows fans to come to its Web site and pay whatever price they feel is appropriate to digitally download the album. Consumers can also spring for a box set that includes a physical CD (with liner notes), a vinyl LP, and artwork.
Interestingly enough, early data suggests that customers are paying comparable prices to what they would pay in stores or online (full disclosure, the author ponied up $10 for the digital download). This is great news for Radiohead, who doesn’t have to split revenue with distributors and the record label. Early estimates pegged the group’s first day take at around $10 million from sales of 1.2 million albums.
Not only will this effort provide a bonanza of data for economists, it is yet another nail in the disruptive coffin of the major music labels.
Historically, record labels provided a very valuable set of services. They scoured the world to identify up-and-coming artists. They helped those artists build fan bases. And they provided different ways for musicians to connect with that fan base.
New mechanisms allow the collective to identify new artists. For example, buzz-worthy bands start attracting friends and friends-of-friends on News Corp’s MySpace. Last.fm (purchased earlier this year by CBS Interactive for around $300 million) keys users into obscure artists they might like based on their preferences. This democratizing of talent discovery mimics changes in the lending industry, where credit scoring techniques obviated loan officers who used intuition and judgment to make lending decisions. Radiohead is demonstrating the power of a direct model in the music industry.
These convenient low-cost models that help customers find new music and deepen connections to artists they love smacks of disruption. Other parts of the media industry face similar disruptive threats, and consistent with disruptive developments in dozens of other industries, historical market leaders are teetering.
One of the music industry’s dirty little secrets is that historically artists didn’t make much money off of an individual album because of costs related to distribution and marketing. Most money came from touring, merchandising, and other ancillary business opportunities. As more established bands follow Radiohead’s approach, that model could change dramatically. Unfortunately for the music labels, that change would only decrease their relevance and mechanisms to make money.
Posted by Paul Michelman on October 30, 2007 11:20 AM
Stan O'Neal may have picked up his final monthly paycheck as CEO of Merrill Lynch, but that doesn't mean he's done earning from Merrill. According to the Wall Street Journal, O'Neal still stands to gain as much as $160 million from pension plans and stock grants.
Some economists are pointing to a downturn in 2008 -- but no one really knows. So, while your CFO won’t let you actually plan for a weak economy, if the economy does soften, you will face explaining a budget shortfall that may already be in progress. Is there a best way to handle such conversations?
Yes. Managers can take several steps to ease the pain of delivering disappointing or ambiguous news -- and perhaps even gain some respect in the process.
1) Lay the groundwork now. Given that the average manager stays in his job less than three years, neither you nor your boss were likely in your current jobs during the last recession. So do your homework. Did your department’s volume decline in 2001? By more or less than the economy as a whole? By more or less than other parts of the company? Have the changes in your business mix since then made your department more or less vulnerable?
Homework in hand, you can have a conversation with your boss now as to what impact a recession could have, and whether to develop contingency plans -- before the pressure cooker of underperformance clouds both of your perspectives.
2) When the problems start, be ready with a plan -- but also with choices. Bad managers report the news and ask their bosses what to do. Good managers have a plan appropriate to the circumstances and to their belief in the best trade-off between short and long term objectives. However, the best managers go one step further -- they genuinely involve their bosses in making the decision by giving them real choices (for example, “I would personally begin these expense reductions today. However, I recognize that will make us more vulnerable to competition if the recession turns out to be shallow. Therefore if you want to protect the upside, we could choose instead to…”)
3) Deliver on the contingency plan. This will not be the first time your boss has dealt with a budget shortfall. Your credibility will not be destroyed by one missed forecast. That said, your standing will be dealt a heavy blow if you must come back repeatedly to report “It’s worse than we thought.” So do not sugar coat the bad news the first time. Own up to the full impact of the shortfall, and make sure you deliver what you now say you can.
Special Feature: Managing During These Uncertain Times
Posted by HarvardBusiness.org Editors on October 22, 2007 11:16 AM
One thing’s for sure: You don’t hear many exhales these days. Executives greet each week with bated breath, and after a barrage of often-conflicting economic news, it’s not surprising that few leaders can emit a confident, lengthy expiration. These are uncertain times.
At Harvard Business Online, we’re not in the business of predicting economic changes or determining whether or not a recession is coming, but we are in the business of helping emerging leaders understand how to navigate their teams and themselves through murky scenarios. And when the economic outlook is unclear, as it is today, a manager needs to approach his or her craft differently -- the allocation of resources, communication strategies, even, potentially, how he or she manages the team or the company.
So we approached some of the smartest people we know -- our Discussion Leaders -- and asked them, “What should smart leaders and managers be thinking about amidst all this uncertainty?”
Tammy Erickson, who writes wonderfully about generational issues in the workplace, offers up a guide for Generation Yers about how to cope with the possibility of their first economic downturn. Renowned globalization expert Pankaj Ghemawatsurveys the world and looks at how -- if at all -- this period of global uncertainty might differ from previous dips. Tom Davenporturges managers to take more enlightened approach to recession-oriented management during the next downturn (whenever that may be) than they have in the past. Bill Taylor, author of Mavericks at Work, presents examples of managers who chose uncertain times to plow ahead with innovation plans and changed the game. Marshall Goldsmith responds to an "Ask the Coach" query about how to keep your team focused on the here and now without ignoring the possibility that hard times may lay ahead. And finally, Kevin Coyne, author of the Harvard Business Review article Surviving Your New CEO, offers two great doses of practical advice for managers: How to build morale when times are bad and how to deliver uncertain news in uncertain times.
We hope this special package gives you some solid ground during these vacillating times. As always, we want to hear from you: What are you grappling with? Do you have any advice for your fellow travelers on how to navigate the uncertain seas ahead? Read some of the assembled thinking and come back and tell us your thoughts.
