Executive Excess Part 4
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PAUL SOLMAN: Jack Welch, welcome.
JACK WELCH: Thank you; nice to be here, Paul.
PAUL SOLMAN: CEO pay. One thing we keep hearing about it: In 1970, 40 times that of the average worker; by 1990, 140 times; today, 500 times or so.
Why did the divergence occur?
JACK WELCH: It occurred for a whole series of reasons, Paul, but primarily the desire in the ’80s and ’90s to more align CEO pay with equity.
PAUL SOLMAN: So the point is ‘let’s give the managers stock so that they’re in the same position as the shareholders’; is that what you mean by aligning interest?
JACK WELCH: That was the idea. Then what happened? The market took off.
As the market took off, total compensation exploded, and the differences became very, very large, as worker compensation generally was related to inflation, plus some productivity gains.
And so the disparity grew as the markets grew.
PAUL SOLMAN: You have written about the idea that the organization ought to be less hierarchical.
JACK WELCH: Right.
PAUL SOLMAN: That workers should have more responsibility.
JACK WELCH: Right.
PAUL SOLMAN: That, in fact, the bottom tier, the bottom ten percent, typically, of workers should constantly be under pressure to either perform or leave.
JACK WELCH: Right.
PAUL SOLMAN: So that would suggest that, then, the gap ought to narrow between the guy at the top, or person at the top, and the people under.
JACK WELCH: Well, you have unionized employees, and unionized employees do not want to participate in a differentiated pay system. So they do not participate in the equity plans in most companies.
PAUL SOLMAN: What do you mean they don’t want to participate? Why?
JACK WELCH: Because they want you to give the same number of shares to each employee. We’ve had many discussions about that with union leaders, and they don’t want differentiation.
PAUL SOLMAN: Because then it pits worker against worker?
JACK WELCH: In their view. In our view, it rewards those who do better versus those who do less.
PAUL SOLMAN: So then you mean that if you had been able… the American industry had been able to pay workers within broad categories for performance and discriminate among them, there would have been less of a gap, do you think, between the CEO…
JACK WELCH: No, I think there’s an enormous increase in the number of workers — workers now being the whole organization — that the wealth gains in the ’90s were enormous, Paul.
I mean, General Electric had — I don’t know the number, whether it was 7,000 or 10,000 millionaires. That happened because stock ownership was spread throughout the company, and a lot of people benefited.
The CEO, yes, got excessive amounts or large amounts. Well, I can say…
PAUL SOLMAN: (Laughs) Is it excessive?
JACK WELCH: It was large. It was very much… you… I can’t justify the absolute number. All I know is that tomorrow morning, if you want to cap it, you’d be the dumbest guy in town because…
PAUL SOLMAN: The dumbest guy in the whole town?
JACK WELCH: The whole town. Because what you would do is you would challenge the free enterprise system.
And what you would say to people that own WorldCom shares tomorrow that are out trying to hire a CEO, “You can only pay that CEO so much.” Or Tyco, who just had to replace their CEO, “You’d only pay them so much.” How do you think they get people to go take those jobs, take those high risks?
PAUL SOLMAN: You don’t think you could get somebody to take the job at Tyco or WorldCom or perhaps a place that’s a little less besmirched?
JACK WELCH: No, I’m giving you troubled situations.
PAUL SOLMAN: Yes. The worst — the worst of the worst; but you don’t think you could get people to do that job for less money than…
JACK WELCH: You won’t get the best people, because the best people are being paid very well where they are.
That’s what free markets are all about.
I grew up in a union family. I didn’t have two nickels to rub together. I went to a state school for $50 a semester — got lucky; got a great team together and made a lot of money. I worked hard as hell. That’s what America is about. We ought to be cheering that. We ought to be hoping there’s lots of people that that’s happening to.
PAUL SOLMAN: You used the word, perhaps inadvertently before, “excessive” pay. Do you think that during this period of the bubble, because of the bubble, you were paid excessively?
JACK WELCH: You… no. No. $600 billion was created.
PAUL SOLMAN: But somebody… one thing I read said even when the stock price of GE went down, you still got more compensation.
JACK WELCH: My personal wealth, if it matters to you at all, has been more than halved, as I haven’t sold a share of GE stock in the last three years — never sold a share of GE stock. So, I mean, I’ve… I’ve gone up with it and I’ve gone down with it.
PAUL SOLMAN: Do you think that the corporate governance system that we have that pays CEO’s is a good one or ought to be fixed?
JACK WELCH: You know, I mean, it’s a very good one. If you focus on pay for performance, and if you focus on results, and you focus on delivery to shareholders, you will get a system that works.
And that’s what we have. All of you critics come up with a better system than a free market system.
PAUL SOLMAN: I’m not a critic. I’m literally asking you the questions that…
JACK WELCH: And I’m giving you a response. We’ve got some ills with this system, but it’s the best one we know how to do. And every time we try and organize it… right now we’re in the process of putting a thousand rules in. Now you…
PAUL SOLMAN: Are you worried about that?
JACK WELCH: Very, very much so. I think you needed some. I’m worried about it.
If you take the risk out of the system, what is it that will make America grow? It’s what made America grow. Don’t throw the ’90s away. The ’90s had its excesses, the ’90s had its problems, but we became the most competitive nation on earth in the ’90s.
PAUL SOLMAN: So how do you explain the scandals? Were you shocked when you found out what Enron had done, for example, Global Crossing?
JACK WELCH: Stunned.
PAUL SOLMAN: Yes?
JACK WELCH: Stunned. Stunned. Perhaps I shouldn’t have been, because there have been abuses in every decade.
PAUL SOLMAN: Yes. Throughout the history of…
JACK WELCH: Of business.
PAUL SOLMAN: …American business, yes.
JACK WELCH: So, I mean, perhaps I shouldn’t have been, but I was.
PAUL SOLMAN: And so, what do you attribute it to?
JACK WELCH: Excesses; bubbles. I mean, you almost felt guilty if you weren’t investing in dot-coms. You almost felt like a dope because your neighbors were saying they just made a doubling and tripling and quadrupling. Everyone got into the hype. The media played a role in the hype, the companies played a role in the hype.
PAUL SOLMAN: Yes, but it… but investing in a dot-com, no matter how stupid it may look in retrospect, is not the same thing as manipulating a, you know, transmission line– as the guy from Enron recently admitted to doing, you know, so that he could pump up the price on the other end of the line.
JACK WELCH: But there’s bad… that’s bad behavior. There’s 17,000 traded public companies, I think. I think so far there’s something like eleven– is that what we’re talking about?
PAUL SOLMAN: I haven’t…
JACK WELCH: I think the numbers are something like that. Let’s go 20, okay?
It’s awful. It’s bad, but in general, there’s millions of good people out there working day and night to do their jobs right.
PAUL SOLMAN: So you don’t think there’s lots and lots of people did this stuff, they just haven’t gotten caught?
JACK WELCH: No! Not at all! Now we have a bad apple here and a bad apple there, but you have that in the town of the size of Tampa every day.
That’s why you have police departments, that’s why you have law enforcement agencies. I mean, the business — are a bunch of good people trying… the whole thing works because of business.
Your network wouldn’t operate without public funds, without donations, without gifts.
PAUL SOLMAN: I’m aware of that.
JACK WELCH: It comes from successful, winning enterprises. Why are the… why are these new governors coming into power in debt-ridden states, frightened to death as they take over budgets that… because the revenues are down, because business is down.
Business is where it all starts. If you don’t generate revenues from business, you don’t end up with a society that works.
PAUL SOLMAN: Right. And the argument I think I’m safe in saying, the critics are making at this point about CEO compensation and about the corporate governance system is that it has broken faith with people so that they don’t believe in the business system you’re extolling as much as they used to.
JACK WELCH: And we have to do things to get them back because we brought into the market a vast population in the last ten years. I don’t know the numbers exactly, but we were over 50 percent invested.
PAUL SOLMAN: Yes. So millions of people came in who were never in before.
JACK WELCH: Never in before. And they deserve to know there’s a fair shot out there. They…
PAUL SOLMAN: Right. And they now think that maybe there isn’t, right?
JACK WELCH: Right. And we’ve got to be sure that we put in place things that give them that confidence.
We’re going through a cycle in American business where — I’ve been out giving talks for the last months — talked to tens and tens of thousands of people, and they’re down.
Their 401(k)s are down, they’re frightened for their jobs; they’re not in that buoyant feeling of going forward. And so we need… we need to have an environment where CEO’s are out taking risks, are out doing things positively, are out creating an atmosphere that we can win again.
Right now it’s a hunker down. It’s a hunker down as there’s trouble in the land, and we’re too good a country and too strong a people to just hunker down.
PAUL SOLMAN: Is the economy in crisis, in a precarious position, about to suddenly turn around because productivity numbers, for example, are good, and long-term that’s what makes an economy grow?
JACK WELCH: As far as the fundamental numbers are concerned, in ’80- ’81, the prime rate was 21 percent.
PAUL SOLMAN: The prime rate of interest — 21 percent — if a company went to a bank to borrow money?
JACK WELCH: Twenty-one percent.
Today, it’s two percent. Long-term rates are 4.5 percent to five percent. Short-term rates are 1.5 percent. Inflation was 13 percent. Today, it’s 1.5 percent to two percent max — maybe less.
Unemployment was double digit, today it’s under six percent. So you’ve got relatively good basic numbers. We are not in a total disaster here, but we do have new factors.
We’re more globalized. China is going to make the… the impact of China on this country in the next five years or ten years is going to make the Japanese of the late ’70s and early ’80s look like a water pistol.
PAUL SOLMAN: And that was a time, certainly by the mid-’80s, late ’80s –
JACK WELCH: Mid ’80s –
PAUL SOLMAN: — where people were saying, “Japan has –“
JACK WELCH: Won.
PAUL SOLMAN: — has won …”Japan is buying up America.”
JACK WELCH: So you have to get your company into a position of massive competitiveness. And it does you no good whatsoever to look at this situation as a pessimist.
Nothing good occurs for people. If you look at this thing as… I see this…
PAUL SOLMAN: This thing meaning the…
JACK WELCH: This economy, this malaise, this scandal plagued environment, this congressional battle, the SEC issues, every one of these things is fundamentally an opportunity.
PAUL SOLMAN: But your point is that if people can be reinvigorated, reenergized, that that in and of itself will have a significant impact on America’s competitiveness in the new global economy?
JACK WELCH: But you got to be… I mean, a cheerleading megaphone isn’t going to do it.
You’ve got to go out and make acquisitions, you’ve got to go out and spend some money on new products, you’ve got to be spending on R&D [research and development], you’ve got to be showing them where you’re going.
PAUL SOLMAN: Well, your successor has just announced he’s going to spend a billion dollars in R&D. And people say, hey, at this time, that kind of money?
JACK WELCH: He’s doing something. He’s getting people energized around new products. See, I happen to think that you cannot leave people in a malaise. Your job as a CEO is to give people the vision of where you’re going.
PAUL SOLMAN: Jack Welch, thank you very much.
JACK WELCH: Thanks a lot, Paul. I enjoyed it.