Monday, October 30, 2006

Giving U.S. Business a Competitive Edge

Conventional wisdom agrees: the Internet has made the world a smaller place. You certainly don't need to be a U.S.-based company to be a U.S. market leader. Take a look at Nokia, Toyota, Mercedes-Benz, Samsung, HSBC, SAP, IKEA, Novartis, Philips … the list goes on and on. The real price of admission to today's global marketplace these days is a great idea, efficient production and brilliant marketing … and that's something our country has no monopoly on.

In his book, "The World is Flat", Tom Friedman cites an old African proverb that gets right to the heart of the matter:

Every morning in Africa, a gazelle wakes up.
It knows it must run faster than the fastest lion or it will be killed.
Every morning, a lion wakes up.
It knows it must outrun the slowest gazelle or it will starve to death.
It doesn’t matter whether you are a lion or a gazelle.
When the sun comes up, you better start running.
In other words, being fat and lazy puts your future at risk. In my opinion, one of the most blatant example of fat and lazy — and therefore one of the biggest threats to American competitiveness — is compensation that is not tied to performance.

Gretchen Morgenson's recent piece in The New York Times — "The Best and Worst in Executive Pay" — cites a study by proxy firm Glass, Lewis & Co., which suggests that, far too frequently, CEO compensation has little or no relationship to shareholder value.

At the 25 companies with the most egregious cases of pay-for-nonperformance, the CEO's take-home pay averaged $16.7 million in 2005, while stock prices fell an average of 14% and overall net income dropped 25%. On the other hand, there were the 25 large-company executives who delivered well for their shareholders and received modest pay: $4.4 million, on average. Their companies' net income grew by nearly 44% and their shareholders reaped average one-year stock gains of almost 40%.

As the playing field becomes larger and more level, CEO pay is one of the most visible symbol of the incredible importance of incentives. If we want our country to continue as an economic leader, we need to stress harder the importance of pay-for-performance. The only way the United States is going to beat competitive nations is by providing value and being rewarded for it … not through guarantees, whether value is provided or not.

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