MBA Education by Allan Cohen

12:54 pm | 0 recommendations | 3 comments

Response to Comment on CEO compensation

11:48 am | 0 recommendations | 2 comments

CEO Pay; Outrageous -- and bad for MBA programs

Though the level of CEO pay compared to average employees is understandable, it is outrageous. CEO pay skyrocketed when companies bought into the academic idea that only shareholders interests mattter. Thus, if executives were incented to reward only shareholders by driving up earnings, and therefore, share price, they would do the right things. Omitted from this overly narrow viewpoint was the relative ease of manipulating earnings, a great temptation to the executives who received shares or options, which are priced at a multiple of earnings. Added to that was the sudden wealth of very young entrepreneurs in the dotcom boom, which irritated executives who had worked their way up the compensation chain much more slowly. Finally, the widespread practice of using consultants on compensation, who determine what average compensation is in that industry, creates a Lake Woebegone effect: few companies want to just pay their CEO the average, so there is a built in escalator.

The reasons for pay getting so high are understandable, but the consequences are terrible. When CEOs are paid 100 times what the lowest paid employees are, cynicism and decreased commitment result, making it harder to get full investment from employees. Efforts to cut costs, sometimes neceesary, are met with counter efforts to protect jobs and benefits, with little regard for external realities. Efforts to induce innovation and new ideas are far less successful than necessary, because employees at all levels focius on "what is in it for me," not what is needed for the company to prosper. And at the top, decisions become more and more short term, to meet Wall St. expectations and protect or elevate stock price, so that payoffs will be high. How else can the CEO walk away with 10s of millions, even though the company may be less well off for the future, or in (all too frequent) extreme cases, where the company is hit with the consequences of the manipulations to earnings, whether they were illegal or uninformed. The subprime mortgage crisis may have been a product of unintentional ignorance of the consewquences and risks of the financial techniques utilized, but the temptations to get in on the earnings/stock price gravy train were potent.

One doesn't have to be against high salaries and other compensation, when earned by organization buuilders who balance long term benefits with short term gains, to see the disastrous consequences of what has happened to pay at the top. Among these consequences is that students are attracted to MBA programs thinking of how fast they can score big money, rather than of how well they canbuild organizations that create great products, develop challenging and interesting jobs for others, help the communities in which the organizations are located, and aid the environment. Professionals are supposed to think more braodly than personal monetary gain; when top managers do not, we all lose.

02:55 pm | 0 recommendations | 5 comments

MBA education; for managers or leaders?

The conventional distinction between managers and leaders, that managers organize to meet goals, while leaders set (new) goals, is rather artificial.  In most organizations, no one can do only one or the other anymore.  With managerial responsibilities comes the obligation to be looking for new and better ways of doing things, finding ways to inspire and not just control people, setting direction and not just meeting predetermined objectives.  Unfortunately, too much of MBA education inadvertently prepares students for just the managerial side of their responsibilities.  There's plenty of talk about leadership and vision, but too much of what is taught is laden with techniques that lead to accepting surrounding conditions, choosing among predetermined alternatives, emphasizing application of formulas and not judgment. 

Students are seldom taught to look at the outlying data, the interesting tails of distributions, the conditions that shape the numbers and allow for leverage, rather than bound "safe" decisions.  The world needs entrepreneurial leaders, who see opportunities where others see problems, who find ways to get things done even when they do not control all the resources, who can push back on organizational restrictions and win support for innovations.

I welcome comments from anyone who is in an MBA program or has been in one, or hires and supervises MBAs.  I'm fortunate to be the dean of MBA programs at Babson, where we try to encourage innovative, appropriate risk taking, but know that it isn't easy to produce, even where we focus on it.  Your experiences?