What You Pay For

by Robert Herold & r & & r & Will paying Avista execs more money really make the utility better?





& lt;span class= & quot;dropcap & quot; & N & lt;/span & ews that the top three executives at Avista will be making salaries of more than $1 million this coming year reminds me of a story my late father told. It was about his run-in with several highly placed corporate-America senior executives -- "captains of industry" -- in a company a whole lot larger and more important than Avista. At the time, my dad was "SP-23" -- that is, he was the head of the Navy's Special Projects Office's Fire Control and Guidance Branch. During the late '50s, when this event took place, SP was directing the research and development of the Polaris weapons system, technically known as the Fleet Ballistic Missile System. The program had the Defense Department's highest priority.





These particular executives represented a company that had won a very large contract. But things weren't going to the liking of SP-23. A top-level meeting was called, the purpose of which was to iron out difficulties. But the company wouldn't budge. A debate followed among staff members from both sides.





Then my father, a man of few words (take my word on this), listened until he had heard enough. Without any fanfare or hyperbole, he broke into the discussion and dryly announced that he was going to cancel the contract and move the job elsewhere.





The executives stared in disbelief. You can't cancel a mega-million contract just like that, they moaned. But he could, and they knew that he would. The captains of industry asked for a moment to commiserate. Several minutes later, they skulked back into the conference room and gave the Navy exactly what my dad had demanded.





& lt;span class= & quot;dropcap & quot; & Y & lt;/span & ears later, when he told me this story, he added a footnote: It was his belief that the top 10 percent of executives in almost any American corporation are interchangeable with the top 10 percent of the executives in any other American corporation that toils in the same sector. Moreover, as he put it, the work force couldn't care less what corporate hierarchy it works under. So when Dad threatened to cancel the contract, he knew that he was threatening only to fire the top 10 percent of the senior executives and replace them with an interchangeable top 10 percent of executives from another company.





Had the top executives demanded to be paid much more because they were so unique and valuable -- well, I can almost see my father smile as he rose from his chair and announced, "This meeting is over; our attorneys will be in touch to wrap things up."





Apparently Dad wasn't alone in his belief that top executives are easily replaceable. All the mergers and acquisitions that ran rampant during the 1980s and '90s were based on just this insight. And except for the corporate raiders who were buying on margin with the intent of cannibalizing their new acquisitions, we saw other mergers that succeeded because the new company was able to seriously cut costs at the top of the hierarchy. My father was threatening to do just this -- to fire everyone who was sitting on the corporate side of the table and replace them without any fuss or muss.





It can be done. And that an insecure board of directors falls for the hollow threat that, should they not pay, they will lose invaluable leadership -- well, unless you're talking about the few irreplaceable people like Steve Jobs or Herb Kelleher, caving makes no sense.





None other than Warren Buffett, the consensus choice as the most successful investor ever, agrees with me. He is dismayed at all the outrageously high salaries going to senior executives -- so much so, in fact, that his investment decisions take into consideration overly generous payouts to senior executives as evidence that the board is either weak or insecure. I have no doubt that the decision of the Avista Board of Directors to award these excessive salaries would send Buffett looking elsewhere.





& lt;span class= & quot;dropcap & quot; & T & lt;/span & here is mounting evidence to show that just because a company pays more, it doesn't always get more. And conversely, just because the company pays less doesn't mean it gets less. Case in point: Toyota, we know, has just blown past Ford in sales and is now second in the world behind General Motors. The president of Toyota makes less than $1 million a year (less than any of our three Avista executives). The president of Ford makes around $14 million. I rest my case.





Avista has a routine job to do: They make sure that my lights come on and that I have heat. The company has been doing this... well, forever. Same water power. Same natural gas. Avista is doing today about what it did a century ago. Despite adapting what I'm sure are some technological advances, Avista ain't Apple, nor Microsoft, nor even Ford. It is a publicly regulated monopoly performing a public service. Kind of like the police and fire departments.





Can a case could be made that Avista would go to hell-in-a-handbag if any of these three executives were to leave for greener pastures? I don't think so. In fact, I'd bet that Avista could pay some comer from within the company's executive ranks, say, half what these three executives got, and Avista would purr along without missing a beat.





Which brings me back to the point my dad made all those years ago. You have to be able to say, "This meeting is over."