Should CEOs Have To Buy Company Stock With Their Own Money?
Originally published on Mon November 28, 2011 5:45 am
STEVE INSKEEP, HOST:
The economy is still far from healthy, and we've been asking people for one idea that could help fix even just one small part of the economy. And we have this latest idea from author and management consultant Jim Collins. He wants to change the way that CEOs are paid. Instead of granting stock options, he says executives should have to buy company stock with their own money.
JIM COLLINS: I want executives who are willing to be aligned in their own risk profile with how well the company does over time.
INSKEEP: Collins studies what makes companies succeed in the long term. He points to IBM and its former CEO, Lou Gerstner, who took over the company in the 1990s when it was near failure.
COLLINS: He could have just said look, what I'm going to do is get rid of a bunch of people and drive the cost down, and give everybody a bunch of options, and we're just going to quickly turn this around. And we will make a whole bunch of money in the short term, but we really don't care whether this company comes back in the long term.
What he did instead was to say no, my responsibility is to get us off the operating table, but then to get us back to be a really, really strong and growing company. And all of the actions he took were focused on building for a multi-decade - not multi-quarter - but a multi-decade perspective. He said look, I do not want to just have my executives have a bunch of upside-only options, where they don't feel pain if we don't do well, but they'll do really well if the stock goes up. And...
INSKEEP: Well, let's explain that for somebody who has never had a stock option.
INSKEEP: You're basically saying that you get an option to buy a bunch of shares of stock at some particular price, and if you drive the share price above that level - $75 a share, or whatever it is - you can make a bunch of money really quickly. But if the share price goes through the floor, you just never exercise the option; you lose nothing.
COLLINS: That's exactly right. And now imagine if instead, as Gerstner did when he came into IBM - he said look, I want my executives not just to have options, I want them to own shares outright. I want them to buy stock outright. And he expected the CEO of the company to own four times his annual compensation in stock outright. And the reason being that if we don't build this company well over time, we - individually - will also suffer. If our employees suffer, we suffer. If our shareholders suffer, we suffer.
INSKEEP: So if I'm getting stock options as an executive, the potential for me is to essentially, buy a bunch of shares very cheaply, and sell them again at a huge profit five minutes later if the company is doing well very, very briefly. You're saying that if, instead, I am just using my own money to buy a bunch of shares, I am going to be motivated for my own retirement, or whatever it is, to think about 10 years from now.
COLLINS: Ten or more. The fundamental responsibility of an executive of a company is to build a great company that has the potential to sustain its position over time, and to add jobs over time. That's a very different responsibility than saying, how can we make the most amount of money in the short term?
INSKEEP: So you are saying you want to attract a different kind of executive by requiring each executive to take a chunk of their life savings, and throw it into the company.
COLLINS: Yup. What it would say is, if you're not willing to put your own skin in the game, if you're not willing to live with the same kinds of potential costs and consequences for a failure to manage well that you're going to expose everybody else to, then you're not showing that you are truly ambitious, first and foremost, for this company doing well over time. And therefore, you don't deserve to be an executive in this company.
INSKEEP: Given your view about short-term versus long-term thinking, what do you think when you look at the news of recent months - and actually, the last several years, where corporate profits have been enormous but companies have been keeping a lot of money in the bank, and in some cases continuing to lay off workers?
COLLINS: In the case of the layoffs, we have all these different pieces of research we've done over the years looking at what separates great companies from good ones. Companies made the leap from good performance to great performance - they never made it principally by cutting a bunch of jobs. You never cut your way to a great company. It just - that's just not how they get built.
Now let's talk about the cash side - separate question. One of the things you find is that in a world that's full of uncertainty and storms and things that can hit you, you have to have the ability to absorb not just one shock but two shocks, three shocks, four shocks, 10 shocks. The companies that prevailed in those environments carried three to 10 times the normal level of cash to assets on their balance sheet. You need buffers in an uncertain world. It is supremely rational to have them. And I would argue that it is very responsible to long-term employment creation to make sure that your company can survive the uncertainty and chaos that is yet to come. We have only seen the beginning.
INSKEEP: Jim Collins, author of "Good to Great" and "Great by Choice," thanks very much.
COLLINS: You're very welcome. It's been a real pleasure. Transcript provided by NPR, Copyright NPR.