Excessive pay's destructive message

When you're at work, some combination of personal pride and fear of unemployment probably motivates you to do a good job.

But chief executives apparently are much harder to motivate. Even though they see themselves as leaders, they require millions of dollars worth of "incentives" to do their jobs -- yet expect their underlings to perform without such a lavish goad.

The divergence of fortune between those in the executive suite and those on the shop floor was on full display recently at Estée Lauder Cos. The company recently laid off an unspecified number of employees in Melville as part of 2,000 previously announced job cuts worldwide. A couple months earlier, it gave its chief executive, Fabrizio Freda, a $250,000 raise and a new stock plan that could be worth more than $24 million, all starting in July. (The poor man had to get by on just $14.4 million in the fiscal year that ended June 30, 2010.)

I consider myself a pretty ardent capitalist. But it's precisely because capitalism is so important that its leaders have to change. If the free enterprise system turns its back on investors and employees -- both of whom are demoralized when executives and board members shamelessly feather their own nests -- it dooms itself to attacks and interference from all who feel abused by it.

Business cannot endure without a moral context. This isn't a new idea; Adam Smith, capitalism's founding thinker, wrote at length about the need for commerce to be guided by values and institutions.

Nations get richer when productivity increases, so it's in everyone's interest for firms to employ as few people as possible to achieve their goals. A smoothly functioning economy should produce ample jobs overall. But that doesn't mean firms have no obligations to the workers they already have -- or that CEOs can cart home millions amid layoffs without anyone minding. The great management philosopher Peter Drucker took a harsh view of such leadership, calling it "morally unforgivable."

He isn't the only noteworthy pay critic. That well-known Marxist Warren Buffett, possibly the greatest investor who ever lived, has branded executive pay practices "irrational and excessive."

Like so many problems, this one is rooted in good intentions. Let's make sure, reformers said, that the interests of CEOs are aligned with those of shareholders. The CEO should work to make the stock go up, and if we give him stock or options -- the right to buy shares at a fixed price -- that's just what he'll do.

But CEOs aren't like baseball players, who negotiate huge contracts with team owners at arm's length. Corporate shareholders are an ever-changing lot; CEO pay is negotiated with the board of directors, which is likely to be all too generous with an executive who often shares business and personal ties and may sit on the board as well. Compensation consultants collect fat fees for justifying these deals.

The irony is that the stock-option grants now common at public companies may be providing incentives for the wrong behavior. It's hard not to suspect that the heads of America's financial institutions, in the boom before the great bust, exposed their stockholders to undue risk in order to drive up share prices and collect millions -- a good example of what happens when business lacks a moral context. Eventually there was a crash, but few bankers had to give money back.

Everyone responds to incentives, but America's CEOs are showered with an embarrassment of riches. It's time for a little more of the former, and a lot less of the latter.

Daniel Akst, a member of Newsday’s editorial board, is the author of “We Have Met the Enemy: Self-Control in an Age of Excess.”