Evolving Excellence

Competing in the Afterlife

I'm generally a free market purist, even when it comes to executive compensation.  That puts me at odds with a large part of society, including some of my fellow lean bloggers, but I have a firm belief that intentionally distorting the free market often leads to unintended consequences elsewhere.  I don't disagree that executive compensation is more than a little unreasonable at times, but I am also starting to see, slowly, the free market reigning in such excess.

However once again even I was thrown into a spot of angst yesterday when I read a news story on how the families of many CEO's get massive payouts if the CEO dies unexpectedly.  Most of us have significant insurance, but not to the tune of hundreds of millions of buckaroos. 

You still can't take it with you. But some executives have arranged for the next best thing: huge corporate payouts to their heirs if they die in office.  Take Eugene Isenberg, the 78-year-old chief executive of Nabors Industries Ltd. If Mr. Isenberg died tomorrow, Nabors would owe his estate a "severance" payment of at least $263.6 million, company filings show. That's more than the first-quarter earnings at the Houston oil-service company.

Ok, even I will admit that's a tad excessive.  The free market is starting to push back, albeit slowly.

Mr. Hall says death benefits have become more controversial in recent years: "Shareholders say, 'Why should we write a big check to a CEO who's been quite well paid all along?' He should have bought life insurance."

I've had company-paid life insurance ever since I was a wee engineer a couple decades ago.  It's a common benefit even at small companies.  I was a little taken aback when my first employer, a Fortune-20 that shall remain nameless even though it has been acquired/sold/divvied up a half dozen times, took out additonal 1x salary policies on every exempt employee... payable to the company.  The reason was supposedly to cover the cost of replacement in the even of our untimely demise, but many of us had visions of hit squads whenever profits took a turn for the worse.

But here's a really odd version of the death payout:

Companies often have "noncompete" agreements with top executives that bar them from joining a competitor after they leave. Shaw Group has one. The Baton Rouge, La., company would pay $17 million to CEO James M. Bernhard Jr. "not to compete with us for a two-year period following termination of employment," its latest proxy statement says.

The pay for not competing would still be due if Mr. Bernhard were dead, a footnote shows. Shaw officials didn't respond to requests for comment.

Ok... I think that might be one little footnote the shareholders might want to scrutinize.  Just like they are putting pressure on our lucky friend Mr. Isenberg of Nabors.

The size of Mr. Isenberg's severance benefit has contributed to boardroom tensions in recent years, according to people familiar with the situation. They say directors have tried to renegotiate the package but haven't been able to come to an agreement with Mr. Isenberg.

The Nabors spokesman, Mr. Smith, denied there is any friction on the board. He said directors and executives are "actively working to restructure" the contract and hope to reach an accommodation that is in the best interests of shareholders.

It is time for a change.  The shareholders get what they allow.  If they don't like how their investment is being used, they can take their money elsewhere, and they should.

Falling Taxes... Except Here

Over the last couple years we've occasionally chronicled how government financial policies can create flights of knowledge.  Fundamentally people move to locales with lower taxes, they then create companies and labor pools and infrastructure, which creates wealth.  You can see this at the state level with the net outflow from New York, New Jersey, and California to places like Nevada.  You can see it at the national level with net ouflow of highly-educated professionals from France and Germany.  Those knowledge migrations can create incredible strain, and a corresponding reduction in the standard of living, on the places they leave behind.

As we pointed out in our most recent post on the subject, many countries are doing something about it. At a time when a couple of the leading presidential candidates and the less financially literate side of the population are asking for higher taxes (ok, "letting tax cuts expire"), France, Germany, the UK, Switzerland, Singapore, most of eastern Europe, and even Sweden are cutting taxes.  Especially corporate taxes, since they realize those business costs are simply passed along to consumers and also reduce the incentive to hire... a double whammy. 

Now tack on a couple more.   First Iceland.

Iceland is known as the Nordic Tiger because of rapid economic growth. Much of the nation’s prosperity is the result of free-market policies, including a 36 percent flat tax on labor income, a 10 percent flat tax on capital income, and a corporate tax rate of just 18 percent (down from 50 percent at the end of the 1980s). But Iceland is not resting on its laurels. The government has just announced a reduction in the corporate tax rate: The corporate income tax will be cut from 18 per cent to 15 per cent, effective for the 2008 income year and come into force in the 2009 assessment year.

And then there's Taiwan.

Meanwhile, even though the 25 percent corporate tax rate in Taiwan is already substantially lower than the 39 percent-plus rate in the United States, Taiwanese politicians apparently recognize that globalization and tax competition are powerful arguments for even lower rates. Tax-news.com is reporting that the government therefore plans to slash the corporate rate to 17.5 percent - and also make unspecified reductions to personal income tax rates.

But in complete ignorance of the Laffer Curve, I guess some illiterati in the U.S. will continue to focus in the other direction.  And then they'll wonder why the country continues to lose jobs... and knowledge.

Addendum: Coincidentally the Wall Street Journal had an editorial yesterday commenting on this very subject, particularly in regards to Mr. Obama's proposal to further increase the tax on corporations which he believes would somehow incentivize them to keep jobs in the U.S.. As the editorial notes:

If the U.S. didn't impose the second highest corporate income tax in the world, companies would have less incentive to move jobs overseas.  Rather than giving politically correct companies a 1% tax credit, it makes more sense to reduce the U.S. corporate tax rate for everyone - by at least 10 percentage points to the global average.

Economists have long understood that companies don't really pay taxes; they merely collect them.  A study by the American Enterprise Institute has show that U.S. workers bear the cost of the corporate income tax in lower wages and salaries.  To borrow Mr. Obama's language, what's really unpatriotic is the 35% U.S. corporate tax rate.

And we wonder why more and more U.S. corporations are moving overseas, taking jobs with them.

Circumventing the Credit Crunch

The credit crunch is on everyone's mind these days, from individuals looking to purchase homes and cars to businesses trying to acquire new equipment. Small businesses, often directly owned by individuals, can be the most affected. Does it have to be so hard to expand?

There's another way, as Ralph Keller, president of the Association for Manufacturing Excellence, points out in this month's Industry Week.

As we move into 2008, the U.S. economy is slowing down and the debate among economists seems to be whether we are going to experience a recession or just a slowdown in growth. The sub-prime crisis and tightening credit markets make it more difficult and more expensive for companies to raise capital, so what can a manufacturer do these days to finance necessary growth?

How else can you raise capital?

Companies that follow a continuous improvement agenda have discovered a ready source of capital to finance growth: harvesting cash tied up in inventory.

The lean way. And of course that requires a change of mindset.

As those involved in continuous improvement will tell you, it's not just a matter of delegating it to your manufacturing folks to implement lean tools. A sustainable commitment to reducing inventory -- including raw, WIP and finished goods -- is really a commitment to change the way you do business and it affects almost all of your business processes. Some people look at inventory as necessary for customer service, but customers don't care if an order is filled directly from your manufacturing operation or from a warehouse, and it's more cost efficient shipping directly from operations.

Which blows down to fundamental changes in operating philosophy.

As many companies have discovered, the journey can be well worth it in reduced costs, generation of cash for growth, improved customer service, higher quality and the ability to compete in global markets. Your production operations have to become flexible to produce small batches -- down to lot sizes of one in some cases -- to be able to manufacture exactly what your customers want, when they want it and in the quantity ordered as cost effectively as your old batch operations.

Your supply chain also needs to change to be able to deliver materials and components in the exact quantity required and when your operations need them. Even your distribution channels need to change to move from a build-to-stock business of standard products to a build-to-order business that allows you to customize your products to specific customer needs.

And last but not least, your traditional financial books may not exactly reflect the operational improvements, at least for a while.

Your CFO should also be involved with your continuous improvement strategy because they will see things happening to your income statement like increasing cost of goods sold, reduced margins and profitability as inventory of work-in-process and finished goods are reduced. Even though cash flow looks much better and the need for borrowing working capital is reduced, it has some short-term negative impacts on your conventional accounting P&L, and your CFO needs to know it's coming.

That last part can really be a barrier with public companies stuck in a traditional accounting mindset. But cash is a concept that any CFO will understand, and when more of it eventually shows up on the balance sheet, their eyes will light up. And finding a new line of credit may not be necessary.

Stagnant is Not Improving

It's that magical time of the year when traditional companies begin setting product and price standards for the upcoming year.  Vast amounts of time are spent calculating... err... guesstimating absorption distribution percentages and peering into crystal balls to determine what materials costs will be a year from now.  They then claim to accurately know the true "cost" of a product.  What a joke.  Didn't we all just attend the Lean Accounting Summit?

But that's not the point of today's missive.  Instead, how many of you send out or receive letters from customers and suppliers claiming that "with considerable effort we are able to keep the price the same as last year."  What an accomplishment!  I won't even hazard to poke a stick in the eyes of companies that believe they should automatically raise prices in line with the CPI, regardless of value or true cost.  The market sets the price, silly!  Or didn't you know that?

Let's get back to the "lucky you we've kept the price flat" concept.  What does that really mean?  Don Boudreaux over at Cafe Hayek had a good anecdote today on what it means in the postal service.

It has been suggested that, because the nominal price of first-class postage is about where it was in the late 18th century, Americans who complain about the proposal to increase postal rates are merely whining wimps who are lacking in historical perspective.

However, the real price of transportation (a key input in postal service) has plummeted over the last 200 years. In 1799 it took 53 days for an Army courier to travel from Detroit to Pittsburgh. Today the same trip can conveniently be made in minutes. Likewise, the productive efficiency of the United States is vastly greater now than it was even a few decades ago.

Given the plunge in transportation costs, joined with other technological improvements and a large increase in the scale of postal activity, the price of postage should have fallen dramatically. Regardless of how today's postal rates compare with rates in the past, opening the delivery of first-class mail to competition would lower rates still further while improving service.

Although it is obviously wishful thinking, presumably every company is working on improvement programs that should significantly outpace and offset overall CPI increases, otherwise they'll soon be Chinese toast.  Therefore there should be very few cases when true product costs actually rise, and those are probably due to screwups with initial pricing... such as those driven by overly-complex and inherently inaccurate standard absorption cost models.

How about trying a different tact this year, with letters along the lines of:

We appreciate your business and in line with our lean partnership we will be adjusting prices throughout the year as we continue to improve our overall value stream.

Or if you are still asked to provide single point pricing for the entire upcoming year:

After reviewing the market-driven value of our product our new price is xx.  We would like to discuss with you how lean manufacturing methods can help us partner to create mutual success.

I guess I could envision a lucky situation where the market value of a product has increased, and no competitors have recognized and taken advantage of that situation.  Just keep in mind that whether you are a customer or a supplier, your success is dependent on the success of the other party.  Don't take a page from the Detroit Three playbook where lean somehow equates to bashing suppliers into submission, and then wondering why they go bankrupt.

Lean Accounting Summit In One Month

We are now only a month away from the Lean Accounting Summit in Orlando, September 27-28.  Rooms at the conference hotel, the Disney Yacht and Beach Club Resort, are selling out fast.  Registration is on track to be a record as well.

We believe this is one of the premier lean events of the year, so much so that Superfactory is one of the sponsors.  Any organization that attempts a lean transformation eventually runs into problems created by traditional accounting methods.  Last year hundreds of companies, large and small, public and private, learned how to confront and change those methods.  They learned how lean accounting can (and must) be compatible with GAAP standards.

This year's Summit has a spectacular agenda of workshops, presentations, and presenters.  Regular Evolving Excellence and Superfactory readers already know some of them... such as one of our blog authors and my co-author, Bill Waddell, and Shingo Prize winner and regular Superfactory contributor Bob Emiliani.  Several of my fellow AME board members, such as Jean Cunningham, Mike Bremer, and Doc Hall will also be presenting.  Mark DeLuzio, who created Danaher's lean business system, will deliver a presentation on strategy deployment.  Art Byrne and Orry Fiume, who lead the Wiremold lean transformation chronicled in Bob Emiliani's Shingo Prize winning Better Thinking, Better Results, will be keynoters.

A great lineup, and great tracks ranging from the basics of lean accounting to implementation methods and case studies.  I'll be there again this year, and would be interested in meeting fellow Evolving Excellence readers and Superfactory supporters.

I look forward to seeing you there.  Don't miss this great opportunity to learn from the best about how to mitigate one of the most difficult barriers to an effective lean transformation.  Register now.

Effective Squishy Metrics

I'm no CFO, but I still subscribe to CFO magazine to get an ongoing flavor for what's happening in the corporate finance world.  After skimming over mind-numbing articles on the intricacies of pension plans and corporate treasury rebalancing, I often find one or two stories that a manufacturing knuckle-dragger like myself can understand.  Last month there was an article on the difficulties with metrics, and how companies are struggling to effectively use them outside of traditional finance.

What would happen if business managers thought more analytically about various aspects of their operations, from customer service to worker productivity to health-care costs to the fruits of innovation?  Some companies are doing just that, extending metrics into areas that would seem to defy measurement. How, for example, do you measure innovation, or the future capabilities of your workforce, or the optimum menu of health benefits?

Ahhh... our beloved "I" word again.  But this struggle isn't all that new; leading companies have been measuring productivity, customer service, and healthcare costs for years.  Unfortunately some haven't put enough time into thinking about what they are measuring and what they are trying to accomplish.  Which is why there's still a problem.

A century's worth of MBAs would seem sufficient to propagate a by-the-numbers approach into every nook and cranny of the business world, but it hasn't worked out that way. By most accounts, companies have done a respectable job of mastering financial metrics, but have largely taken a flier on measurements of operations or intangibles such as customer satisfaction or brand loyalty.

Regular readers know what we think of most (no, not all, Mark!) MBA's, so that's no surprise.  Although many of us have adopted balanced scorecard methods with some success.

Fifteen years ago the advent of the "balanced scorecard" sought to redress this imbalance by demonstrating how nonfinancial metrics could be captured and used to help managers "see their company more clearly — from many perspectives — and make wiser long-term decisions," according to its creators, Robert Kaplan and David Norton. But despite the popularity of that approach at a strategic level, many consultants and academics say it left thorny questions unaddressed at more tactical levels.

Which is exactly what we mean by really thinking about why you are measuring some attribute, and how you will react to the results.

"I'm continually astounded at how poor the use of metrics continues to be," says Brent Wortman, a senior partner in the financial-management practice at Deloitte. He cites as common problems the inclination to roll numbers up from the bottom, so that the board and senior management are overwhelmed by irrelevant numbers; the lack of standards for linking operational and financial metrics; and the failure to put enough rigor behind hard-to-measure attributes, such as customer services, opting instead for either poorly conceived metrics or none at all.

What are some of the sins of metrics according to Wortman?

Among his "seven deadly sins" are vanity (emphasizing metrics that you know cast you in a good light), provincialism (allowing functional departments to measure themselves only on their own narrowly defined goals, often at the expense of the organization as a whole), and "inanity," which he defines as a failure to appreciate the consequences of a given metric. As an example, he cites a fast-food chain that focused on reducing the amount of wasted food; to improve that metric, restaurant managers stopped the practice of cooking in advance of anticipated demand. Waste was reduced, but service was delayed and sales suffered.

The article does portray some companies that have created innovative metrics that work... and create a positive change. A few brief summaries of some examples:

Wells Fargo relies on what it calls a "happy-to-grumpy" ratio to assess whether its efforts to develop a more "engaged" workforce are on track. "We don't want to just measure results," says CFO Howard Atkins, "we want to measure what drives our results, and that includes team-member engagement.

Hilton Corp. found that a 5 percent boost in customer-retention rates led to a 1.1 percent improvement in revenue in the following year. That, he says, is the emerging frontier: finding causal linkages between financial and nonfinancial metrics.

Best Buy has been measuring employee engagement for a decade "and customer satisfaction in a systematic way for three years," says Joe Kalkman, vice president of HR capabilities. "But we are just in the first year of understanding how these two metrics relate to one another."

At Pitney Bowes metrics played an important role in redesigning health benefits. The company has collected "de-identified" data on employee health claims, absenteeism, visits to on-site health clinics, and related measures for more than a decade. Realizing that chronic diseases such as diabetes accounted for a huge percentage of health claims, the company redesigned its benefits so that preventive care is either free or available at very low cost.

Read the article for more detail on how those companies developed and effectively leveraged those metrics.  With enough forethought well-designed metrics can help turn the intangible into tangible to guide improvement activities.

Pay For Performance and Wage Inequality

Pay for performance and merit pay have become popular in the manufacturing world to incentivize increased output, and if done correctly, quality and innovation.  In the lean manufacturing arena we believe that pay must also be tied to team and organizational performance. 

More traditional organizations continue to provide annual cost of living adjustment increases, however those are like a drug.  Employees become effectively addicted, performance often decreases, and as the Detroit Three have found out, you end up paying more than your competitors for an equal labor quantity.  COLA is also like a self-fulfilling prophecy in that as you increase pay, you increase buying power, which increases demand, which increases inflation... which increases the cost of living.

Tyler Cowen at the Marginal Revolution blog had an interesting post this morning telling us of a study that links pay for performance with wage inequality.  The income gap and reduction of the middle class have become a political hot button lately, although some of the facts about income inequality and the resulting tax contribution run counter to prevailing wisdom.

In effect the study from the National Bureau of Economic Research concludes that pay for performance has significantly contributed to wage inequality by boosting the income of the most productive while incomes of less productive workers, and those not in a pay for performance program, remain stagnant.

An increasing fraction of jobs in the U.S. labor market explicitly pay workers for their performance using bonuses, commissions, or piece-rates.  We find that compensation in performance-pay jobs is more closely tied to both observed and unobserved productive characteristics of workers.  Moreover, the growing incidence of performance-pay can explain 24 percent of the growth in the variance of wages, and accounts for nearly all of the top-end (above the 80th percentile) growth in wage dispersion.

I had never thought of pay for performance being a contributor to this widening gap, and 24 percent is pretty significant.  Many on a certain end of the political spectrum want to reduce the gap by reigning in income growth on the high side.  Perhaps this study shows that that policy is misguided and would hurt productivity and performance, and instead we should reduce the gap by increasing income growth on the low side through wider use of pay for performance. 

As Tyler concludes, "For me the puzzle is why the world held back so much on bonus pay for so long."  Well, partially because bonus pay without true ties to performance is counterproductive and has been abused.  But with true performance goals it can be very powerful, and a win-win that increases productivity and quality as well as personal income.

Dreams of Lean Accounting Standards

Certain aspects of traditional accounting, driven by the generally accepted accounting principles (GAAP), have stymied the efforts of lean manufacturers for many years.  Perhaps of considerably more impact those principles create a perceived barrier in the eyes of many CFO's.  The reality is that vast improvements can be made while complying with traditional accounting methods, but that perceived barrier prevents many companies, especially those that are public, from even starting down the lean journey.  One well-known example of a problem with GAAP is that inventory is considered an asset, where lean considers it a waste... a liability.

Yesterday there was a small article in the Wall Street Journal discussing how the U.S. and EU were going to streamline accounting standards by 2009.  My eyes lit up, and I immediately wondered if finally accounting standards were going to align to the realities of modern, especially lean, businesses.  A little research took me to a press release by the International Accounting Standards Board (IASB), which publishes the International Financial Reporting Standards (IFRS).  The press release discusses activities between the SEC and IASB to harmonize GAAP and IFRS.

The Commission anticipates issuing a Proposing Release this summer that will request comments on proposed changes to the Commission’s rules which would allow the use of IFRS in financial reports filed by foreign private issuers that are registered with the Commission. The approach in the proposed rule would be to give foreign private issuers a choice between IFRS and U.S. GAAP. In addition, the Commission plans a Concept Release relating to issues surrounding the possibility of treating U.S. and foreign issuers similarly in this respect by also providing U.S. issuers the alternative to use IFRS.

So basically both foreign and U.S. companies would have a choice between GAAP and IFRS beginning in 2009.  So... what is IFRS?  It turns out that PriceWaterhouseCoopers has a very informative website dedicated to the subject.  Detailed information on key financial aspects are covered via links on the left side menu... assets, liabilities, revenue, expenses, and the like.  And the application of IFRS to certain key industries, such as banking, retail... and automotive also have further detail. 

Automotive is probably the closest to general manufacturing, so let's take a look at that page.  There's a good discussion of the full value stream from raw material through aftermarket services.  Even the impact of kanban and just-in-time methods. But let's try to find something specific, such as the inventory example we mentioned earlier.

A further search on the same website locates a page dedicated to the impact of IFRS on inventories.  And there we find what we're looking for.

Inventories are assets: held for sale in the ordinary course of business; in the process of production for sale; or in the form of materials or supplies to be consumed in production or in rendering services [IAS2R.6].

Sigh...

But as we mentioned earlier, vast operational improvements can be realized even within the constraints of traditional accounting.  Unfortunately it appears lean manufacturing will continue to fight a problem of perception.  Perhaps the growing lean accounting movement will help improve the situation.

A Lesson for Layoff Lemmings

Ford, Whirlpool, NCR... and hundreds of other companies:  you've laid off thousands of people, tens of thousands of years of knowledge, experience, and creativity.  As Dr. Phil likes to say, "how's that working for you?"  (for readers wondering why I know what Dr. Phil likes to say, click here)

An article in this month's The New Yorker titled It's the Workforce, Stupid may give you a clue to what your future holds.  You might have thought that layoffs would help your stock price and inancial performance, but perhaps you should think again.

Instead of rising sharply, the stock of companies that trim their workforces is likely to fall. A recent meta-study that surveyed research from several countries, covering thousands of layoff announcements, concluded that, on average, markets had “a significantly negative” reaction to job cuts.

Downsizing may make companies temporarily more productive, but the gains quickly erode, in part because of the predictably negative effect on morale. And numerous studies suggest that, despite the lower payroll costs, layoffs do not make firms more profitable; Wayne Cascio, a management professor at the University of Colorado at Denver, looked at more than three hundred firms that downsized in the nineteen-eighties and found that three years after the layoffs the companies’ returns on assets, costs, and profit margins had not improved.

But many CEO's are just in the job for the short-term gain, not long-term growth. 

The increasingly short-term nature of C.E.O.s’ jobs, along with the pressure on them to deliver results quickly, doesn’t help matters. The average C.E.O.’s tenure today is just six years, long enough to see the benefits of downsizing (like a lower payroll) but not long enough to suffer costs that may appear in the long term. And the lack of job security means executives have to worry more about what analysts are saying.

And even in the face of contradicting financial data, analysts still believe that layoffs work.  And they can apply pressure.

While the market as a whole may be skeptical about downsizing, many powerful people on the Street aren’t. Before Citigroup announced its layoffs, for instance, it had to contend with a chorus of critics—including its biggest shareholder—insisting that the company was a bloated giant that needed to get its costs under control. Even if the job cuts didn’t move the stock price, they were at least a sign to those critics that the company was listening.

And that leads to a lemming effect... companies and executives believing that layoffs... err, downsizing... is an effective business strategy.

On top of all this, a C.E.O. is likely to look to layoffs as a solution because that’s what almost everyone else does, too.  Downsizing has become less a response to disaster than a default business strategy, part of an inexorable drive to cut costs. That’s why Circuit City can proclaim, “Our associates are our greatest assets,” and then lay off veteran salespeople because they earn fifty-one cents an hour too much.

But the fact that the market as a whole no longer rewards news of layoffs may be a good sign for the future.

This isn’t to say that Wall Street has gone soft—it still cares about profits, not people. But investors seem to understand that fewer people doesn’t always mean more profits. The problem is that too many companies today define workers solely in terms of how much they cost, rather than how much value they create. This is understandable: after downsizing, it’s easier to measure a lower wage bill than it is to see the business the company isn’t getting because it has too few salesmen, or the new products it isn’t inventing because its R. & D. staff is too small. These lost opportunities may be hard to measure, but over time they can have a huge impact on corporate performance. Judging from its reaction to layoff announcements, the stock market understands this. It’s time executives did, too.

Wow... can it be that The New Yorker actually understands the value of people?  The real value... not the traditional balance sheet and P&L value?  I would add "and analysts" to the very last line of the preceding quote, as they can be the kingmakers.  They hold the keys to capital market movement, and therefore control the pursestrings of many executives.  A few gutsy executives are starting to buck the trend by refusing to provide shorter term financial projects and insisting on focusing long term, but they are few and far between.

Look beyond your traditional financial statements and think about what your employees are really worth.   

No Muda in Aisle 7

The furor surrounding executive pay usually centers on either the (gross) disconnect between performance and pay or the somewhat vaguer feeling that it's (grossly) unethical for the average CEO to be making  so much money.

But there's a lean perspective to the argument for lower CEO pay as well.  Stratospheric compensation for top executives, as well as the CEO, undermines a sense of community and shared commitment to the company, which in turn erodes employee loyalty and increases turnover.  And that's waste, pure and simple.

The Wall Street Journal today ran an article on executive pay at Whole Foods Market.  The company raised the cap on executive salaries to 19 times average pay in order to retain its top talent:

The increase was needed "to help ensure the retention of our key leadership," Chief Executive John Mackey wrote in a Nov. 2 message to employees.  Mr. Mackey said every top executive, except him, had been repeatedly approached by search firms seeking to lure them to rivals.

Notwithstanding the increase in the salary cap, the company's top six executives hit the maximum, and had to forfeit as much as $237,000 for which they were eligible under a bonus program.  Mackey's total compensation in 2005 was around $2.7 million, about 96 times the average worker. (According to the Institute for Policy Studies, in 2005 the average big company CEO made 411 times the typical US worker.) 

You'd think that with such a low compensation ceiling -- and with real, quantifiable lost income -- executives would be leaving in droves.  But they're not:

Executives say they stay for other reasons.  The company prefers to promote from within, so executives tend to be loyal veterans.  Whole Foods' top 25 executives have an average tenure of 18 years, and a 2% annual turnover rate. . . .  [The company's] corporate culture is another draw.  Paula Labian, vice president of human resources, says the company's egalitarian philosophy -- all employees vote on their benefits packages every three years -- and its many social-welfare and environmental projects keep her there, despite offers of twice as much in pay. 

Think of the muda that Whole Foods reduces with their policy: they don't squander shareholder money on gargantuan pay packages, they don't lose talented managers, and they don't lose critical institutional experience and know-how.  (For contrast, think about Home Depot and its former CEO, Bob Nardelli.)

Would this approach work everywhere?  I doubt it.  It's hard to image lower pay flying in a Wall Street investment bank.  But it does work for Whole Foods, and would probably work for other companies as well.  If nothing else, the sense of egalitarianism would go a long way towards improving relationships between management and staff in the Detroit, where top brass seems to go out of their way to irritate the UAW; check out Mark Graban's excellent comments here.)

Next time you hear about a company's board of directors claiming that they had to provide their CEO with a staggering pay package, think about what the real cost to the company might be.