Executive Opulence - an Indicator of Impending Problems

 

One of the interesting developments of the past decades in business has been the tendency towards companies treating their executives as deserving of treatment at a level of luxury disproportionate to their value.  It is easy to understand why this should be so. 

The decisions in regard to salaries, perks, office standards and pandering to the desires of the people at the top of an organisation are largely made by those at the top – the people who decide are the people who benefit.  The salary structure of the people immediately below the level at which they are determined by the Board are set by those at the top, and they are set at a level that easily justifies the million Rand per month salaries that the very top level are paid.  After all, if the man on the third level of management is paid a salary of R800 000 per month, how can the Chief Executive be paid less than a million?  The same applies to the car the CEO drives and the office he occupies.  Generally, the decision to set the organisation up in this way is not a conscious one.  It happens.  It is very easy for a man in control of a very large amount of money to convince himself that an improvement in his own benefits is in the interests of the company.  It is very easy to sell an idea to yourself. 

The result of all of this is that many – probably most – large companies with remote shareholders spend far too much on the top level of management. 

Of course, numerous CEO voices will be protesting that this is not true, that they are the ones responsible for earning the profits of the company, that it is necessary for them to operate (they never say ‘enjoy’!) in conditions that are indicative of the success of the company!  There is some degree of truth in this statement, but is it completely true?  Would the company be less successful if the CEO’s salary were 20% less, if his car cost R300 000, rather than R1 200 000, if the Head Office building were renovated every ten years, rather than every three years, if the lobby floor were tiled with ceramic tiles rather than with marble?  The test is whether that CEO would spend the same amount from his own resources for the benefit of the company.  It is interesting to see how often people who own a company put much less into plush offices than do employed Chief Executives, and how much more is invested in productive assets, rather than in luxuries.  An interesting example is the State President.  Would he purchase a R2,4 billion aircraft from his own funds, when he already has numerous less expensive aircraft already, most of which can meet most of the requirements of his job?  He is not alone.  Any observer of the developments in the South African Government scene cannot have failed to notice how many Civil Servants drive Range Rovers, S Class Mercedes Benz or 7 Series BMW cars.  Do these really contribute to their effectiveness more than would a car costing R250 000?  (This calls to mind a comment in the 1960’s, that the United States Government had decided not to bring down the Mafia because of the disastrous effect that would have on the sale of Cadillac cars!)  A survey of the purchase of luxury motor cars in Germany in 1992 revealed that only 3% of S Class Mercedes were purchased by private owners, the balance of 97% being purchased by companies and Government for use by their senior people!  The reason?  Only 3% considered that the benefit of ownership of such an expensive vehicle outweighed the cost!  All the rest were making the purchase decision on the basis that the personal benefit was greater than the personal cost.  Using someone else’s money makes it a lot easier to decide to spend that little bit more.

In 1997, in the early stages of the recovery of South Africa, and particularly the recovery of the Black population of South Africa, from the ‘ravages of Apartheid’, my company, a Management Consultancy specialising in the development of industries, was involved in the negotiation of the establishment of a large factory in a deprived South African Province, employing initially some 427 people.  A German company had offered to provide all of the capital for the establishment, all of the technical know-how, and a contract for five years to purchase the planned high-technology products of the factory on favourable terms.  The German company was to take 50% of the shares in the company, and a Black Empowerment group, led by Sam X, was to be given the balance of 50%, with the right to acquire a further 30% of the shares at cost over the next five years.  A dream deal in every way!  The negotiations broke down when Sam X, at the meeting called to sign the contracts, demanded that the German company provide, free of charge, two 7 Series BMWs and two Gold Cards to cover the cost of ‘demonstrating the importance of the business’!  It was very difficult for the Germans to understand this demand, particularly in light of the fact that the CEO (and owner) of that company, a man who had built the business himself by working at night in his garage to develop the products that were being handed to the South African company, still drove a five-year old Volkswagen!  That business went to Vietnam, and the German retained ownership of the entire operation.  He had learned the lesson that it is easy to spend someone else’s money on luxury.

The widening gap between the top level of employed and the bottom level is a clear indicator of the seriousness of this problem in South Africa, as is the increasing lack of competitiveness of industry in the country.  It is a fact that South Africa is slipping in its competitiveness ranking in Africa, as in the world.  We are a Third World country with First World standards at the top of our employment table. 

In Management Consultancy, in cutting costs in an inefficient company, it is clear that the cost of the top man is usually in the region of a hundred to two hundred times the cost of the average productive worker.  By firing the Chief Executive, you can afford to hire an additional one to two hundred workers producing income!  By not purchasing his executive car, you can apply a million Rands to the purchase of a new machine!  By halving the luxury of the Head Office, without in any way detracting from the performance of the people working there, you can build a new factory!  Obviously, this is not the whole picture by any means, but it is a picture that should be borne in mind by any senior manager when he negotiates his salary package.

If there is to be a real effort in bringing South Africa into a competitive position in the difficult world market that it faces, every party to the productive effort needs to make a reassessment of what is really necessary.  Trade Unions need to ask whether an above-inflation wage increase is preferable to ensuring the continued existence of the companies employing their members, Government needs to consider whether it is preferable to purchase another personal airliner for the President or to build another twenty factories to enable people with ideas to start producing their products, Chief Executives need to consider whether their Shareholders, the people who ultimately pay the cost of their salaries, benefits and luxurious offices, would not rather have another factory producing products, or another machine cutting the cost of those products.

Just as the demands of the Rock Drill Operators at Lonmin for large wage increases are driving the development of automated equipment to do their jobs, so the demands of senior executives for more and more are driving the shareholders in their companies to invest in other companies, not necessarily in this country, the customers of their products to buy from China, India and Vietnam, and potential investors to countries and to producers that are more moderate in their spending on luxury.