Golden Parachutes

This morning my wife heard the news that the now failed bank of WaMu would be making a payout of $19.5 million to its departing CEO. Her reaction was understandable -- who are we bailing out here? A normal reaction, but got me to wondering about how concerned we should be about the amount of executive pay.

First, is it unprecendented? Consider Andruw Jones, a baseball player signed by the Los Angeles Dodgers this year for $36 million (guaranteed). Here was an aging star on his downside who performed abysmally during the year. By any standard he did not earn his exhorbitant salary . . . didn't deserve to even play. So why did the Dodgers pay him $36 million? Because that is what it took to get him to come to work for them. This is a similar situation companies face hiring CEOs.

Second, whose fault is it? In the case of Jones, nobody asks the player to give up the money; they fault the boneheads who signed him. So the ones who are at fault for these companies are the boards who supposedly represent the shareholders. Those that are hiring the CEOs agree to these golden parachutes, in part, to get them to come to work. It is a market mechanism as the wage is not set necessarily on the value but on the supply and demand for the position sought.

One conclusion drawn by some (see this link to people now calling for a new New Deal) is that it is the fault of the market, because it is not impervious to things like greed and corruption. Others defend the market such as this from the Chicago Tribune. I think the bigger error is that these companies overvalue experience, overpaying for people based on what they have done in the past. Think about it: the Dodgers would have been much better off just taking a chance on a 23-year prospect, paying him well less than $1 million. Many of these companies would be better off looking at managers with less experience or slighter pedigrees. Probably, most of them reside within the company if they just develop them and give them a chance.

The Power of Teams

This past week, I was once again reminded of the how important teams (and well managed ones) are.



First, this weekend, the U.S. in somewhat of an upset recaptured the Ryder Cup (golf's American-European biannual team competition). They did this after losing the last 3 competitions -- the last two by lopsided scores. They did it without the best player on the planet, Tiger Woods. And they did it with 6 rookies on the team. So how did they do it?



Golf is an individual sport, but the Ryder Cup is the closest thing professionals get to a team golfing event. But it would still seem that even in this event you are only as good as the talent on the team. But actually, teams can generate synergy that makes them greater than the sum of their parts. Sometimes this synergy (or team dynamics) is spontaneous or just happens. Usually, however, it happens because of a leader with a plan.



The U.S. team's leader, Captain Paul Azinger, did some things like a) set up 4-man sub-teams that played together to prepare for the team events; b) picked players based on toughness and youth rather than "over-rated" experience; c) and focused his team (many of them millionaires) on performance rather than getting along with each other (he did away with some of the common cushy perks that were prevalent for previous Cup squads). Most importantly, Azinger had a plan and implemented it. Sometimes luck is the result of hard work and a well thought out plan.



Second, and much more offbeat . . . last week I had the opportunity to work with about a dozen managers in different fields. One of these managers is also a fan of the Cleveland Indians, but his lifelong fandom has ended temporarily -- thanks to the wonderful world of capitalism. At mid-year, Cleveland threw in the towel for the season trading their best player. This fan decided to be a mercenary and sell his fandom on eBay!



And he found a buyer who paid $300 so that this disaffected Indian fan would now become a Chicago Cub fan for the rest of the year. Terms of sale: must watch at least one Cub game a week and send two emails about the Cubs a week -- as long as the Cubs are still playing this season. Entrepreneurism alive and well! Now why didn't Royals fans think of this.

Busy week at the Fed

A week ago tonight, our Center for Leadership and Ethics sponsored a talk by Thomas Hoenig, CEO of the Kansas City Fed. Talk about timing -- coming on the heels of the bailout of Fannie Mae and Freddie Mac and now just before the meltdown of Lehman Brothers. The 10th District Fed Chairman did not disappoint as he gave a succint history of the Fed -- created as a way to counterbalance Wall Street--and then gave insight on the macro factors now affecting the turbulent economy. While a distressful time for many right now, the news right now is quite instructive on the risks and rewards of a market system.

Since the beginning of the semester, several other local business leaders have come to speak to our business students. In August, Irv Hockaday came to speak to our Fellows. They have also heard from local businesspeople Bob Gourley, Terry Dunn, Danny O'Neil, and Barnett Helzberg.

This is one reason it is so good to teach at Rockhurst and, I trust, to be a Rockhurst student of business.

Experience, Part II

I was one of the 37 million people that watched Sarah Palin speak at the Republican Convention last night. Even opponents seemed to agree this person from "nowhere" can give some speech. To cut to the chase, there is strong sentiment among many people that Mrs. Palin is a new political star. And hardly anyone heard of her a week ago. This makes me wonder: how many other raw talents we have never heard of are out there?

Go to the book store and you will find any number of books on how to get to the best colleges. Families now invest in couselors to help them get their teenage children eligible for Yale, Brown, or Cornell. The purpose is to grease the way to the elite experiences that lead to the best opportunities. Nothing wrong with this, but how many times do we see people who underperform their resume? I was talking to a faculty colleague and he noted the number of experienced executives -- many of them with exquisite predigrees -- who are recycled into new jobs to continue to underperform their "so-called" credentials.

Politics aside, Sarah Palin has outperformed her resume (graduated from an shool in Idaho and started in the PTA) and not just based on the speech (read here on what she has accomplished as governor). My guess is there are scores of other people in other fields with equally inauspicious credentials who perform at very high levels. I would much prefer to be under-credentialed and over performing. There are many, many of these overachievers anonymously getting things done in all walks of life.

I don't need to teach at the Ivy league to work with smart, high performing colleagues. Most importantly, I look for some more of these raw talents to emerge to have . . . Rockhurst degrees, of course!