High executive pay and the collaborative economy

Call it collective intelligence, Web 2.0, swarming, or crowdsourcing—we’re supposed to be a new kind of world where collaboration and loosely structured groups always win. So why are senior executives making so much more than everyone else? Last Friday the New York Times reported that Office Depot CEO Steve Odland made $12 million, which is more than four times what the second highest paid executive there makes. In 2004, the average CEO made, on average, 431 times more than the rank-and-file worker; in 1990, it was “only” 107 times more. If it’s all about collaboration, then why are a few superstars making all the money?

Most economists argue that superstar salaries make sense, and not only for CEOs. Take pop stars: Princeton economist Alan B. Krueger studied the money they made from their concert tours between 1982 and 2003, and found that in 1982, the top one percent made 26 percent of all the revenue, where in 2003 their share jumped to 56 percent. Take sports: Twenty years ago, the best paid baseball player was Gary Carter, who earned $2.4 million from the New York Mets—41 percent more than the 25th-ranked player. This season, the top-paid player, Yankees Roger Clemens, is making $28 million, more than twice as much as the 25th ranked player. Even American universities, long resistant to market forces, are embracing the superstar phenomenon. Hiring one big-name professor can raise a school’s reputation faster than hiring ten mid-level scholars—and that professor can easily make twice as much as his mid-level colleagues.

By way of explanation, economists note that organizations are more complex and more global than ever before, and that the competition for top talent is more severe. When it comes to pop music and sports, they point out that the globalization of American sports means that more money is coming in; and the psychology of the fans leads them to glorify specific players. You can only wear one player’s number on your jersey when you go to the game. So economists conclude that small differences in ability can translate into huge differences in pay.

But when the rank and file keep hearing about the benefits of collaboration and teamwork, you can’t blame them for being cynical. Is all this talk about collaboration really just a sham?

No, and the new science of collaborative networks resolves this apparent paradox. First, scientists have discovered that it’s common for networks to have positions of great power, even when the network depends on the collective actions of everyone to succeed. Second, it’s not often realized that CEOs today are, in fact, extremely effective at fostering collaborative networks, both in their organization and with other organizations. CEOs are paid more not only because their companies are larger, but also because their companies participate in extensive collaborative webs with other companies, other countries, and complex networks of customers. Third, the superstars of today get all of their earning power from the network that they represent. Pop singers and baseball players are paid more because their fan base is larger, with new media outlets overseas and with more effective marketing that leads to greater fan loyalty.

As collaborative networks become more powerful, the salaries of those who can create and manage them grows. The growth in executive pay is an outcome of the growth of collaborative networks. Superstars get all of their power from us.

4 thoughts on “High executive pay and the collaborative economy

  1. All for one and one for ______?

    Dr Sawyer,
    In your post you wrote: “But when the rank and file keep hearing about the benefits of collaboration and teamwork, you can’t blame them for being cynical. Is all this talk about collaboration really just a sham?”

    What have you found are the main motivators of the average employee to collaborate in the workplace?

    The motivator should be a no-brainer for a ceo. Collaboration improves company performance through improved processes and innovation which can significantly impact a ceo’s overall compensation, prestige and marketability.

    The cynic may say that the same can’t really be said of the rank and file collaborative employee. Seems that a rising tide doesn’t life all boats in the corporate ocean or am I missing something?

    (I hope I’m not just being sucked into “group think” caused by the latest ire over excess exec pay in the news over the past few months!)

    Best wishes,
    Paul

  2. Getting the incentives right is absolutely critical…and, very complex. Executives always ask me about that and I have to say, there is no silver bullet that works for everyone–you need a good compensation/benefits consultant to shape a package that works for your unique culture and organization. However, there are a few basic incentive features that you find in the most collaborative organizations; I think Gary Hamel’s book The Future of Management does the best job of identifying these by analyzing three cases: Gore, Google, and Whole Foods. One core feature is that your teammates do your annual review and set your raise and bonuses. I can’t tell you how many companies I’ve spoken at where folks just grimace when I suggest that.

  3. Rick Wartzman, director of the Drucker Institute at Claremont wrote a piece for Business Week last year. He said that Drucker had warned that allowing an enormous disparity in income (between ceo’s and others) to exist “corrodes”. “It destroys mutual trust between groups that have to live together and work together.”

    I would have to add that until this issue is resolved in an organization, (and it is a sticky one) collaboration will ring hollow and will restrain the full potential of collaboration.

    This is unfortunate as I believe that it is innovation through collaboration that will lay the foundation for our country’s economic revival and ability to compete globally in the years to come.

    BTW – Just purchased The Future of Management over lunch. I look forward to the read. Thanks and as always I appreciate your insight.

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