THE BLOG
10/10/2013 01:08 pm ET Updated Jan 23, 2014

Pay or Perish

America's largest companies with revenues over one billion are at it again. They awarded their CEO's a median 2012 pay package of $15.1 million, an increase of 16 percent from 2011, according to a 2013 report in the New York Times. Bloated CEO pay packages may trigger the SEC to soon institute a new rule requiring companies to disclose the pay gap between CEOs and rank and file employees

U.S. multinational corporations continue to argue that without dramatic pay incentives, they will suffer debilitating brain drain and lose their competitive edge. Unregulated and unlimited pay for performance is still perceived as a rite of corporate American passage even if CEO performance is not superlative. Moreover, with senior executive salaries surging again, rank of file and middle management, all but the top 1 percent, have become disillusioned with corporate American values, according to recent surveys.

As US economists and management theorists debate the merits of pay for performance, many Scandinavian companies have been outperforming the titans of American industry using a brand of management that doesn't rely on paying their CEO's anywhere near what their American cohorts receive. For example, with net profits of 25.7 percent 1, the Danish company Novo Nordisk, a global leader in pharmaceuticals and biotechnology, trounced its American competitor Pfizer, which had gains of 14.8 percent 2. Yet, Ian Read, CEO of Pfizer, received a total compensation package of 25 million3 in 2011 while Lars Rebien Sorensen, CEO of Novo Nordisk, was paid 2 million.

H& M, the Swedish retail giant, racked up net profits of 14 percent 4 in 2011 while the Gap, its US global competitor, profited 6 percent that year 5. Gap CEO, Glenn Murphy, received a 2011 compensation package of 9.7 million -- 362 percent more than his H&M counterpart, Karl-Johan Persson, who was paid 2.1 million 6.

Consider the Norwegian petroleum behemoth Statoil, which paid its CEO, Helge Lund, 2.1 million on net profits of 11.7 percent 7. His rival at Exxon Mobil, Rex Tillerson, was compensated 34.9 million 8 in 2011 though the company profited just 8 percent 9.

Although both Morgan Stanley Chase and Swedish banking giant, Swedbank, had profits in excess of 17 percent in 2011, their CEO compensation packages were stunningly different that year. Chase's James Dimon racked up 23 million 10 in compensation while Swedbanks's Michael Wolf received just 1.2 million 11 -- a difference of 1817 percent! To add insult to injury, Michael Wolf was not eligible for a bonus like most Scandinavian executives.

Despite modest Swedish CEO pay packages, the Swedish bourse blue chip index rose 116 percent between 2000 and 2010, handily beating the US Dow Jones Industrial average of 70 percent.

So how do Scandinavian companies achieve these results year after year?

Although management approaches abound, few are as novel or successful as what I call Management Theory S, Scandinavian management. Theory S flows from two deeply held Scandinavian values: all people are equal, and the common good is more important than individual success. These values are radically different than US corporate assumptions and are reflected in all aspects of Scandinavian companies from management to marketing. Consider the Scandinavian manager.

Described as "first among equals" in Scandinavian business textbooks, the manager is essentially a coach, not a boss, and ensures that each decision reflects the perspectives of the employees. Democracy -- the assent of the majority -- is not good enough for the Scandinavian manager: Consensus is required. This means that companies like Norwegian Statoil, the third largest producer of the world's oil, and the Swedish engineering conglomerate ABB, with over 120,000 employees worldwide, are run by managers who "take" decisions, extracting them from their employees rather than "making" decisions for them. Not surprisingly, decisions that are "taken" -- Scandinavian nomenclature for deliberating consensually -- require time to crystallize, but the process is necessary to ensure that employees implement them.

In Theory S management, employees are not required to comply with a decision -- they are persuaded to accept it. Since Scandinavian managers cannot easily reward or punish their employees, logical persuasion and group consensus are the most effective management tools they have. Pay for performance, manager and employee bonuses, and stock options -- all so fundamental to American companies - are closely regulated in Swedish, Danish, and Norwegian companies and are often viewed as unfair! In fact, an employee or manager is not supposed to receive significantly more money than her peers regardless of performance because it violates equality and threatens the fabric of the group. For this reason, salary differences for employees and managers, with the exception of CEO's, are modest. And all salaries are subject to marginal tax rates as high as 60 percent, a Scandinavian mechanism for regulating equality.

The aim of Scandinavian management is to nurture a climate of company loyalty, group spirit, and open dialogue where individuals are not primarily motivated by the expectation of reward or punishment but rather the belief that what they are doing is in the best interests of their colleagues and company.

To achieve even better results, U.S. companies should consider radically altering their corporate cultures along the lines of Management Theory S. This means replacing sky high senior executive compensation packages with more modest salaries that truly reflect executive performance. Accomplishing this also requires supplanting the current winner-take-all US corporate climate with a big dose of Theory S values like equality, open communication, and group commitment. Management Theory S offers the revolutionary prospect of creating more successful and humane U.S. corporations that manage collaboratively, restore loyalty, remunerate fairly, share decision-making -- and still make lots of money!

Robert Shuter is Professor of International Communication at Marquette University and Director of the Center for Intercultural New Media Research. He is the author of Understanding Misunderstandings and Communicating in Multinational Organizations.

He can be reached at robert.shuter@marquette.edu

1 http://annualreport2011.novonordisk.com/web-media/pdfs/Novo-Nordisk-AR-2011-en.pdf 25.7%= net profit/total sale, see in Page 1; CEO remuneration, see in Page 46, shown in US dollars in the article.

2 http://www.pfizer.com/files/annualreport/2011/financial/financial2011.pdf 14.8%= Net income/revenues, see in Page 16

3 http://www.pfizer.com/files/annualreport/2011/proxy/proxy2011.pdf see in Page 70

4http://about.hm.com/content/dam/hm/about/documents/en/Annual%20Report/Annual_Report_2011_P1_en.pdf 14% =net profit/sales excluding VAT see in page55

5 http://investors.gapinc.com/phoenix.zhtml?c=111302&p=irol-reportsAnnual 6%=net income/net sales, see in Page 17 in 2011 Annual Report; CEO compensation see in Page 45 in 2013 Proxy Statement

6 http://about.hm.com/content/dam/hm/about/documents/en/Annual%20Report/Annual_Report_2011_P2_en.pdf see in Page 30 Item 21, shown in US dollars in the article

7http://www.statoil.com/annualreport2011/en/Download%20Center%20Files/01%20Key%20Downloads/10%20Annual%20report%20on%20Form%2020F/AnnualReportonForm20-F.pdf 11.7%= net income/total revenue and other income, see in Page 5; CEO compensation see in Page 209, converted to US dollars in the article

8 http://ir.exxonmobil.com/phoenix.zhtml?c=115024&p=irol-reportsproxy see in 2011 Executive Compensation Overview

9 http://www.exxonmobil.com/Corporate/Files/news_pub_sar2011.pdf 8%=net income/total revenue and other income, see in Page 41

10 http://files.shareholder.com/downloads/ONE/2723604606x0x556146/e8b56256-365c-45aa-bbdb-3aa82f0d07ea/JPMC_2012_proxy_statement.pdf see in Page 26

11 http://www.swedbank.com/idc/groups/public/@i/@sbg/@gs/@ir/documents/financial/cid_492351.pdf see in Page 117