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Introduction

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Are chief executives, stockbrokers and bankers really worth the gigantic (and perhaps, shocking) salaries they receive? They certainly believe that they are really adding value to their businesses by providing them with a competitive edge and an ability to generate large profits; they want us to believe it too.
However, some commentators are critical of managers and deem their pay excessive; such criticisms can even be found within the business community, Luke Johnson is an example of an individual who doubts that board directors do enough to justify their pay, he says:

“One day I would love to conduct an experiment by replacing the entire board of directors of a major corporation with shop dummies and see how well things go. I’m confident most organisations would carry on regardless – and quite a few would unquestionably perform better. Out would go mad strategic initiatives, doomed takeovers, suicidal rebranding exercises and so forth. Responsible leaders on the ground would be able to get on with the job without distractions.”

The remainder of this wiki critically evaluates the role of a manager, their pay and their current criticisms so that you may make your own decision concerning the value of managers.

The Role of Management

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Individuals make value perceptions by comparing their expectations with their own perceptions on delivery (Zeithaml, 1988). For such a reason it is important to investigate the general consensus concerning managerial expectations. Widely accepted definitions of managers consider them individuals responsible for “effective planning, delegating, co-ordinating, staffing, organizing and decision making” (Sayles: 6), although such a definition appears to be reliable and all-encompassing, the accuracy of such definitions are contested; newer academic discourse suggests that managers do not carry out the aforementioned activities, but play a complex, intertwined role involving interpersonal, informational and decisional functions (Mintzberg, 1990). Mintzberg’s (1990) definition of a manager adds to the classical view, as this adaptation of his work shows:
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This module has looked at some of the managerial processes above, including leadership, entrepreneurialism and change management. These processes are said to create wealth for a firm through successful identification and effective execution of new business opportunities (Teece et al, 1997).

The tacit or immeasurable nature of managerial activities, coupled with conflicting definitions of management, indicate that the role of a manager is misunderstood (perhaps even by management); and that this may, at least in part, play a role in management criticism.

For the purpose of this Wiki, a manager can be anyone who is in a position of formal authority or status, most specifically those at the top of an organisation, such as a general manager, director or a CEO.

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Criticisms of Managers

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The contested expectations of management were highlighted in the previous section, and this was considered to be a factor in why the role of a manager is scrutinised.
Slack (2010) argues that managerial decisions are of paramount importance to the success of a company, and require both a holistic approach and significant skill; critics oppose such notions, their disapproval falls in to two broad categories:
  • Some argue that managers are overcompensated for the value they create
  • Others dismiss the notion that they add value at all, considering the manager a destructive force.

Managerial Compensation

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An assortment of individuals have criticised managers and their respective remuneration packages, arguing that they do not reflect the value that the manager adds to the business, and is excessive. Although governments and front line staff have criticised executive pay, the wiki highlights academic work and empirical evidence which has been produced, as this is deemed the most reliable.

Recent work by Chang (2011), a professor of Economics at Cambridge University, suggests that executive compensation in both the UK and US is too high. He argues that the remuneration packages that top executives receive have been growing more rapidly than any other type of worker since the 1960s. His comparison of similarly sized and successful organisations in the US found that CEO pay was 40 times that of an average worker in the 1960s, 100 times in the 1990s, and is now around 400 times average worker pay. In relative terms, this suggests that current CEOs are overcompensated.

Significant work has been produced in response to criticisms of executive pay, many conclude by suggesting that CEOs in some countries are comparatively overcompensated (Ebert et al, 2008; Thomas 2004; Mishel et al). McKnight (1996) argues that this is especially true for top executives in the UK, as no link between pay and performance was found. The following graph depicts pay disparities of executives and their workers in the 15 biggest companies of each country, indexed against the US:

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In many countries, such as Japan, Germany and Belgium, average workers are compensated similarly, whilst their CEOs earn significantly less than their American counterparts. Employees in Switzerland actually earn more than the average US employee, whilst their CEOs earn less (64%) than their American comparators. Whilst the average UK worker earns less (67%) than their US counterpart, so do CEOs (55%). This implies there is greater executive remuneration equality in the UK in comparison with the US, but when compared to other countries it is evident that there is still a high degree of inequality, and this has contributed to criticism of UK managers.

Case Study: Fred Goodwin at RBS

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The 2008 financial crisis provides a recent example of such criticism. The actions of management at UK banks were intensely scrutinised. In particular, Fred Goodwin’s aggressive expansion strategy was blamed for RBS’ part nationalisation. Fred Goodwin was forced to step down as manager of RBS as a condition of government help. Whilst little fuss about Fred’s remuneration package was made before the collapse, his previous pay and severance package caused uproar. Fred Goodwin eventually reduced the amount of his severance package after mounting pressure – but he still receives a pension worth over £300,000 per year (Tryhorn and Inman, 2009). More recently, The Queen rescinded his knighthood (The Cabinet Office, 2012).
When brought to light, many different stakeholders deemed Fred Goodwin’s remuneration package unjustifiable; before the financial collapse, Fred’s actions delivered high profits for shareholders who were previously silent about his pay. Since the financial collapse, shareholders have become increasingly agitated with executive compensation, as they appear to be rewarding themselves whilst unable to deliver high profits which would ease these shareholders’ concerns.
Such scrutiny means that managers are more likely to have to demonstrate their value or prove their return on investment to both shareholders and other stakeholders; an inability to do this is likely to result in further conflict between the aforementioned parties.
This documentary provides further information about the financial collapse, whilst documenting Fred Goodwin’s role and remuneration.

Parasitic Managers

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Some individuals go further than considering many managers overcompensated, by arguing that they add no value to an organisation at all. George Monbiot (2011) considers the holders of some of the most prestigious management titles in the world parasitic destroyers of wealth:

“The claims that the ultra-rich 1% make for themselves – that they are possessed of unique intelligence or creativity or drive – are examples of the self-attribution fallacy. This means crediting yourself with outcomes for which you weren’t responsible.
The findings of the psychologist Daniel Kahneman, winner of a Nobel economics prize, are devastating to the beliefs that financial high-fliers entertain about themselves. He discovered that their apparent success is a cognitive illusion. For example, he studied the results achieved by 25 wealth advisers across eight years. He found that the consistency of their performance was zero. ‘The results resembled what you would expect from a dice-rolling contest, not a game of skill.’ Those who received the biggest bonuses had simply got lucky.
Such results have been widely replicated. They show that traders and fund managers throughout Wall Street receive their massive remuneration for doing no better than would a chimpanzee flipping a coin. When Kahneman tried to point this out, they blanked him. ‘The illusion of skill /…/ is deeply ingrained in their culture.’”

Monbiot (2011) essentially argues that ‘the 1%’ take credit for organisational success and reward themselves with obscene pay cheques. Although Monbiot’s (2011) journalistic background should be taken in to consideration when assessing such claims, he cites empirical evidence to back up many of his points.

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Corporate Psychopathy

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Whilst such an idea might appear farfetched or conspiratorial, the subject of corporate psychopathy is one which is both relevant in the context of managerial criticisms and an emergent trend. Similarly to Monbiot (2011), some commentators consider management a destructive force, and argue that the current business landscape rewards individuals who possess certain psychopathic traits.

The term ‘Corporate Psychopathy’ was coined by Professor Robert Hare, a psychologist responsible for the creation of the Psychopathy Checklist, which is used to diagnose cases of psychopathy. Hare has turned his attention to corporate psychopathy and argues that individuals lacking empathy, remorse and risk aversion are able reach high levels of management, as such traits are advantageous. Like many psychopaths, they are said to be charismatic, manipulative and power hungry (Babiak and Hare, 2007).
Hare recently studied 203 corporate professionals who were selected by their companies to participate in a ‘development program’; Hare and his acquaintances used the Psychopathy Checklist and demographic information in an effort to identify psychopathic traits in the individuals. Possession of psychopathic traits was four times as prevalent among the corporate professionals studied than would be expected in a general population (Babiak et al, 2010).

35 minutes into the below podcast is a short (15 minute) excerpt from the book ‘The Psychopath Test’ by Jon Ronson: as well as highlighting some of the psychopathic traits, it provides a managerial perspective of what such findings mean to a business leader, as Ronson revisits an interview with Al Dunlap.


Whilst the term ‘corporate psychopathy’ is new, the idea that management can be a destructive force is not. Similar opinions have previously been posited, Baumol (1990) has argued that businessmen are unlikely to consider the social returns when making decisions concerning financial returns, and further studies have found that successful businessmen are more willing to take risks that affect others to further their own self interest (Brennan et al, 2008).
In an effort to avoid criticisms, managers must pay close attention to both the interpersonal and decisional roles which they are expected to undertake. They must ensure that they are conducting such duties ethically, and must consider their actions from the point of view of other stakeholders.

Summary

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Firstly, it is important to recognise that all actors in business are regularly criticised, and that the current trend appears to be high level management compensation. The role which governments play in business is regularly criticised, investors are sometimes considered parasitic themselves, and front line staff are regularly criticised for being lazy or dishonest.

Business actors looking to reduce the criticism they receive need a clear understanding of the activities which they are expected to perform, and to ensure they are undertaken effectively.

High level managers need to have a firm grasp of their role in an organisation, ensuring that their actions reflect this. More modern definitions of managers suggest that they are responsible for the direction of organisational outcomes (Hambrick and Mason, 1984), which implies that they must lead by example. An inability to justify pay might imply that a leader is exploiting the company, and provides an example for others to do the same; such actions will negatively impact the longevity of a company, which is unfavourable for all stakeholders.

Kaplan (2008) argues that CEO and executive pay is driven by market forces and that manager remuneration is a true reflection of their value, whilst Chang (2011) agrees, he predicts that company’s who overcompensate their CEOs will be outcompeted by organisations who do not allow managers to take such liberties.

The Fred Goodwin case study does not demonstrate this: the burden of the financial meltdown was externalised to taxpayers and shareholders. Results such as these are undesirable to everyone except the minority of managers who exploit such opportunities; notions that high level management are parasitic or psychotic might be sensationalist, but they provide evidence to suggest that the current business landscape favours the wrong kind of management; shareholders and stakeholders must hold management accountable for their actions and remuneration, and managers must ensure that their actions are in the best interests of the organisation and are not driven by selfishness or short term thinking.

Discussion Points

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    1. What is the difference between Leadership and Manipulation?
    2. The module has looked at different types of organisational structure (co-operatives, peer-based organisations and employee-share ownership), many of which reduce the number or importance of management roles. With consideration for the respective advantages and disadvantages of managers, should such structures be more commonplace?
    3. Is your boss a psychopath? Take the test.

References

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Babiak, P., & Hare, R.D., 2007. Snakes in Suits: When Psychopaths go to Work. United States: Harper Collins.

Babiak, P., Neumann, C. S. & Hare, R. D. 2010. Corporate psychopathy: Talking the walk. Behavioural Sciences the Law, 28: 174–193.

Baumol, W.J., 1990. Entrepreneurship: productive, unproductive and destructive. The Journal of Political Economy, 98 (5), 893-921.

Brennan, G., Guth, W., Gonzalez, L., & Levati, M.V., 2008. Attitudes toward private and collective risks in individual and strategic choice situations. Journal of Economic Behaviour and Organization, 67, 253-262.

Chang, H., 2011. 23 Things they don’t tell you about Capitalism. London: Penguin Books.

Ebert, F.C., Torres, R., & Papadakis, K., 2008. Executive compensation: Trends and policy issues. IILS Discussion Paper No. 190. Geneva, International Institute for Labour Studies.

Hambrick, D.C. & Mason, P.A., 1984. Upper Echelons: the organisation as a reflection of its top managers. Academy of Management Review, 9 (1), p.193-206.

Johnson, L., 2010. How to tell a CEO from a Dummy. London: The Financial Times. [online] Available from: http://on.ft.com/IIlV3G [Accessed 01/05/2012]

Kaplan, S. N. 2008. Are U.S. CEOs overpaid? Academy of Management Perspectives, 22 (2), p.5–20.
McKnight, P. J. 1996. An Explanation of Top Executive Pay: A UK Study. British Journal of Industrial Relations, 34: p.557–566.

Mishel, L., Bernstein, J. & Shierholz, H., 2009. The State of Working America 2008/2009. Cornell University Press / The Economic Policy Institute.

Mintzberg, H., 1990. The Managers’ Job: Folklore and Fact. Harvard Business Review, 68 (2), p.12-20.

Monbiot, G., 2011. The 1% are the very best destroyers of wealth the world has ever seen. London: The Guardian. [online] available from: http://www.guardian.co.uk/commentisfree/2011/nov/07/one-per-cent-wealth-destroyers [Accessed 05/05/2012]

Sayles, L., 1979. Leadership. New York: McGraw-Hill, Inc.

Slack, N., Chambers, S., & Johnston, R., 2010. Operations Management. Essex: Pearson Education Limited.

Teece, D.J, Pisano, G., & Shuen, A., 1997. Dynamic Capabilities and Strategic Management. Strategic Management Journal. 18 (7), p. 509-533.

The Cabinet Office, 2012. Goodwin Knighthood Decision. London: The Cabinet Office. [online] available from: http://www.cabinetoffice.gov.uk/news/goodwin-knighthood-decision [Accessed 05/05/2012]

Thomas, R.S., 2004. Explaining the international CEO pay gap: Board Capture or market driven? Vanderbilt Law Review, 57 (4), p.1171-1267.

Tryhorn, C., & Inman, P., 2009. Fred Goodwin to hand back more than £200,000 a year of his pension. London: The Guardian. [online] available from: http://www.guardian.co.uk/business/2009/jun/18/fred-goodwin-rbs-pension [Accessed 07/05/2012]

Zeithaml, V.A., 1988. Consumer perceptions of price, quality, and value: a means-end model and synthesis of evidence. Journal of marketing, 52 (July), p.2-22.