When Bernie Madoff was busted for a Ponzi scheme that cost investors an estimated $17 billion, many of us wondered how someone could do something so terrible.
It's easy to place the blame for many of our societal problems on newsworthy criminals. But the truth is that most of us engage in minor acts of ethical misconduct that, cumulatively, have a worse effect than any of the crimes that make the news.
Hard to believe, right? Humor me as I start with a small example, followed by some data that show the scale of damage caused by the cumulative effect of small misdeeds.
I used to work at a cafe in which employees were instructed to mark unsalable items on the "waste list." Whenever a cookie broke or a batch of hummus went bad, we had to mark the item on the list and jot down a short explanation of what prevented these materials from contributing to the store's bottom line. This practice was created to help the cafe maintain a tight inventory and to help management determine how to prevent waste and use the store's resources more efficiently.
Unfortunately, the waste list did not always serve this goal. Many employees found ways to use it to steal free food for themselves and their buddies by taking what they wanted, marking the item on the waste list, and making up a reason that the item was no longer salable.
If you've worked in retail, you've probably also witnessed such misconduct, along with creative ways of ensuring the theft goes undetected.
It's hard to imagine that theft like this can add up to anything close to the money stolen in the corporate scandals reported in the news, but the following data speak volumes.
A quick review of some key facts and figures will help us understand how crimes like those outlined above can impose high costs on society.
In North American retail stores, losses from employee theft are greater than losses from shoplifters and gangs. Just as striking, employee theft accounts for 44.1% of North American "shrinkage" -- the loss of goods between point of manufacture and point of sale. Employee theft cost businesses nearly $20 billion in 2011.
In addition to the losses occurring through the theft itself, businesses spend a great deal of money on security to prevent such theft. Globally, retail businesses spent an estimated $28.3 billion on loss-prevention security. So businesses aren't paying for just the goods that are stolen, but also for security to prevent even more from being stolen -- and they pass those costs on to consumers in the form of higher prices.
Guess Who Pays
Many employees commit these crimes to punish their employers for what they perceive as unfair compensation or to punish their bosses for perceived unethical treatment. And they often rationalize their behavior by telling themselves that if anyone has to pay for their theft, it will be the company's executives -- and they can afford it. With CEOs pulling in such large salaries these days, it's easy for employees to think that their executive bosses can afford the hit.
Highest Paid CEO's
Mini-Madoffs: How Our Tiny 'Thefts' Add Up to Madoff-Scale Damage
In 2011, Ford (F) paid Mullaly $29.5 million, a 11% raise over the previous year. Mullaly has long had an interesting, somewhat fraught, relationship with compensation. In 2008, as the auto industry was taking a nosedive, he drew fire when he and other auto execs traveled to Washington, D.C., on private jets seeking help for the industry. Shortly thereafter, Mullaly sold most of Ford's corporate jets and drove a hybrid car to Washington for his next meeting. That year, Mullaly agreed to accept a $1 annual salary if Ford received a government bailout. Instead, the automaker kept its head above water without federal aid, and Mullaly took home $13.6 million. The next year, he made $17.9 million.
Daane has been the CEO of Altera (ALTR) since 2000. One of the nation's largest producers of programmable logic devices, the company is a major player in semiconductors. Daane's 2011 salary was $29.6 million, a 278% increase over the prior year.
In 2011, Marathon (MRO) paid Cazalot $29.9 million, a 239% raise over the previous year. Unlike many top CEOs, Cazalot's training isn't in law or business, but rather in geology, and under his leadership, Marathon has vastly expanded its overseas investments. While Marathon has certainly had a good year, the majority of Cazalot's raise came from a change in the company's incentive program, and likely will not be repeated.
In 2011, Iger was paid $31.4 million. A modest 12% increase over the previous year, Iger might be one of the few CEOs who was underpaid that year. A major force behind the studio's 2009 purchase of Marvel Entertainment, Iger's management decision that has given Disney (DIS) a major cash cow. With The Avengers breaking box office records and sequels to Thor, Iron Man 2, Captain America, The Avengers and The Hulk in the pipeline, it looks like Iger's purchase will continue paying for itself long into the future.
Cote has been leading Honeywell (HON) for 10 years, but 2011 was a particularly good one. He was paid $35.7 million, a 135% raise over the previous year. Then again, Honeywell seems to have a lot of money to spend: Between 2008 and 2010, it spent over $18.3 million on lobbying, laid off 968 workers, made $4.9 billion in profits and increased compensation by 15% for its top five executives. During the same period, it not only paid no taxes, but actually received $34 million in tax rebates.
On the surface, Dauman's $43.1 million 2011 salary seems to be a disappointment; after all, it's a 49% drop from the previous year. Then again, he received a 148.6% raise in 2010, the top CEO raise that year. And things might be a bit tight in the Dauman household: Earlier this month, he sold 286,447 shares of Viacom stock (VIA), almost a third of his personal holdings, for $13.8 million.
Motorola Mobility CEO Jha was widely reviled by his employees. In fact, he has received a 50% approval rating from Motorola workers, who also give their workplace a failing grade of 2.6 out of 5. So why did the mobile phone exec receive a 2011 compensation package worth $47.2 million -- a 262 percent increase over his 2010 pay? Well, this huge windfall reflects Google's purchase of the company, a deal that gave Jha a golden parachute of three times his yearly salary, in addition to an eventual payout of $52.5 million for his stock options.
In 2011, Discovery Communications (DISCA) paid Zaslav $52.4 million to run its collection of networks. A 23% increase over his 2010 salary, this reflects, among other things, Zaslav's efforts to develop OWN, the Oprah network.
Depending on who's doing the accounting, Moonves' compensation package in 2011 totaled either $68.4 or $69.9 million. Either way, he got a salary boost of over 20% last year, making him the highest paid media CEO in the U.S. Several pundits have questioned his high salary and amazing bonuses, but CBS' stock (CBS) took a 42% boost last year, and it is currently the top-rated television network, a position that many credit to Moonves' stewardship.
In addition to being the highest paid CEO in the U.S., Simon also got the biggest raise. In 2011, he brought home $137.2 million, a 458% increase over his previous year's salary. Shares in Simon Property Group (SPG) -- America's largest mall operator -- went up by 22% last year, a promising trend in a business that has long been facing declining sales.
But rapidly rising CEO compensation shows that CEOs aren't the ones taking the loss on theft. Most businesses recoup these losses by passing them on to consumers through higher prices -- with one estimate showing that the cost of theft to the average U.S. family in 2011 was $435. Ouch!
None of this excuses the behavior of people like Madoff. They deserve our scorn and punishment. But minimizing the cost of unethical conduct requires finding ways to prevent both the small number of major crimes and a vast number of smaller ones.
Motley Fool contributor M. Joy Hayes, Ph.D., is the principal at ethics consulting firm Courageous Ethics. She doesn't own shares of any of the companies mentioned. Follow @JoyofEthics on Twitter.