Turn Every Worker Into An Owner
September 21, 2002

The backlash against lavish executive compensation is growing. Gargantuan pay packages. Sweetheart loans. Corporate retirement bennies like free airplane flights, well-appointed apartments, fine wines, and multiple cell phones. The compensation and perks granted the imperial CEO in office and out all adds up to a ridiculous payoff. The average CEO today makes around 530 times the pay of the average hourly worker compared to 85 times in 1990 and 42 times in 1980.

Yet there is no economic justification for the record pay gap. Stupendous stock option awards have fueled the increase in executive pay over the past decade. But almost all the stock option schemes in the Standard & Poor's 500 companies don't attach performance conditions to option grants. Management makes a difference, but not to the extent of today's bloated CEO salaries.

The good news is that stock options are under scrutiny. The flashpoint has been the expensing of stock options—their cost charged against profit and loss accounts—to improve disclosure. The crony capitalists on the board of directors are also under pressure to index executive options to a benchmark such as the S&P 500. This way, management is only rewarded for extraordinary entrepreneurship rather than pedestrian stewardship.

Both these initiatives are worthwhile. Yet lost in the rhetoric has been the real problem with stock options: Far too many go to senior management and not enough—if any—to the rank-and-file. The board should slash the amount going to their friends in top management and spread the wealth throughout the workforce. Yes, CEOs might have to do with two rather than five vacation homes. But broad-based stock option plans recognize that ownership creates a sense of belonging, an egalitarian meritocracy that shows up in higher productivity and worker entrepreneurship.

Look, we've learned over the past decade that the most dynamic, innovative, and flexible companies tap into the ideas and energy of all employees. Competitive advantage is no longer controlling lots of assets or plenty of capital. It's talent and brainpower, the human and intellectual capital, that works on all rungs of the corporate ladder. The best ideas often spring up in unlikely places, on a plant floor or a clerics cubicle. Management's job is to create a culture that rewards innovation. Stock options are a valuable tool for building an enterprise that shuns bureaucracy and encourages risk-taking.

Adam Smith talked of the need to turn "every man a merchant." He was right. That is the challenge. Shareholders will profit—and the economy benefit—if they overthrow the CEO Imperium and instead insist on turning every worker into an owner.

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