Are top executives paid too much?

Home Depot shareholders enjoyed record earnings in 2005, and Chief Executive Robert Nardelli took home $38.1 million in total compensation that year. When Nardelli recently resigned and invoked his $210 million severance package, the news was reported with hints of outrage. But Home Depot committed to the severance package years ago.

Why do top executives receive outlandish rewards, even when they fail or when they resign, while employees of the same company receive so little by comparison?

You would think our news media would help put it in perspective, but the chattering class – reporters, TV talking heads and many politicians — seems to be stuck in a predictable rut of envy on behalf of the masses. After all, why should any one man be paid more than thousands of others combined could earn in a year?

I’ll take a shot at it.

The implied notion of equality in the distribution of wealth, to reduce or remove the disparity between rich and poor, seems to underlie much of what we hear from the chattering class when a CEO scores a huge payday.

Equal outcome has a warm and fuzzy ring to it for the uninformed, but the rest of us know that socialism has proven disastrous in practice. Our capitalist system, by contrast, has created the most powerful economic engine the world has ever seen, the envy of people everywhere, founded on competition and self-interest, even greed, if you like.

Capitalism has some rough edges, but does it ever work! Those who risk their capital sometimes lose that capital, and sometimes the gamble pays off and they get rich. The rest of us like to gripe about their wealth while we collect a lifetime of paychecks from the jobs their wealth has created.

Politicians and reporters, of all people, should understand our system, but they seem to forget the foundation of our capitalist system is the motivation of self-interest, the pursuit of profit.

Investors purchase stocks, an ownership share of a corporation, hoping the stock will rise in value and pay dividends. These shareholders elect a board of directors, who seek out the very best executives they can afford, to create the business strategy, to lead the corporation with vision, to make the tough decisions with consequences to thousands of employees and billions of the corporation’s dollars.

Where do they find executives like that, people who have proven their skill in such lofty and difficult endeavors with a track record of success, people willing to commit themselves 12-18 hours a day, seven days a week in a pressure cooker even though they travel in limousines and private jets?

Are the very best executives readily available, waiting for the phone to ring with an invitation to their next job?

No! The top executives sought by the board of directors are highly successful, probably actively engaged at another company. They are few, they are rare, and they must be hunted individually, discreetly contacted, courted, wooed, lured by new challenges, enticed with bucket-loads of money, platinum benefits and golden guarantees in case they are fired or resign.

Home Depot found Nardelli at GE in 2000, and part of his hiring negotiations included paying costs of extraction from his contract with GE and his $210 million golden parachute, among other pay and incentives.

Was it excessive, even obscene? While the rest of us might think so, the only respondents to that question who matter are the shareholders and directors who offered the incentive and paid the bill.

And their answer will be wrapped in the incentive package Home Depot offers to Frank Blake, the ex-GE executive who came to Home Depot four years ago and is selected to succeed Nardelli.

The difference between top executives and the rank and file of employees is vast. Most of us work for companies far below the executive floor. We get wrapped up in our career track, health care coverage, accumulated vacation and sick time, pension plans, 401ks and other benefits designed to attract good employees, just the way sweetheart contracts attract the very best executives.

We lose sight of the fact the purpose of the corporation is not to protect and preserve our jobs. We are nothing more than one of the assets put in place by executives to get the job done.

We are a widget, a cog in the gearbox, and we are expendable. A strategic decision in the boardroom could end our job tomorrow, and may create new jobs in Ohio, or Bangladesh.

The purpose of the corporation is to make money for the shareholders. This greedy system works in cycles where one company may fail while others succeed and grow and provide an expanding job base. Most new jobs are created by small businesses, even though the news would have you believe the U.S. president creates, or loses, jobs. Actually, the president has little to do with jobs.

Those greedy shareholders, by the way, include you and me through our IRA, 401K, pension plans and other means of buying stocks or mutual funds.

If you are one of the few left out of investing so far, it’s all up to you. Get busy, get a job and start saving to invest, to be part of the American dream.

Who knows, you might one day start your own small business. If it grows, you might create jobs by hiring people. You might employ some who watch too much TV and come to believe your business purpose is to provide them security and a paycheck, and that your own salary should be limited.

You might even find yourself wondering why too may American reporters and politicians seem never to understand our wildly successful capitalist system, and the utter failure of the socialist goals that are entwined in so much of what they have to say.