Are You Paying for Non-Performance?
When we consider the measure of leadership’s worth, the current structure for corporate compensation is a very curious matter.
We hire leaders to shepherd critical activities and specific initiatives. To compensate them for meeting these expectations, we provide them with a competitive, predetermined base salary with the commitment to a greater reward – a bonus – for exceptional results. But somehow all work becomes focused on receiving a bonus. Was not the base salary itself structured to achieve improved results or change? In overlaying a bonus, are we paying twice for the same expected results? Are there different measures of success that drive these two very different elements of compensation?
Our businesses can be wounded by boards that do not take the time to pragmatically understand compensation, or by CEOs and executive chairs who themselves benefit from a faulted pay structure. This malady is not well doctored by outside compensation consultants. These consultants are touted as impartial, but their continued engagement is dependent on them satisfying these same boards and executives. (When is the last time that you heard a consultant tell his executive or board clients that they were over compensated?) For the ultimate in corporate governance and responsibility, we think that we can turn to non-executive (outside) board members. But, even their compensation benefits from pay structures that are similarly constructed and monitored.
To justify what they believe are essential pay levels to attract and keep talent, businesses look to marketplace compensation as a key reference point – what are others paying incumbents in similar positions? Unfortunately, that marketplace is an epidemic roll-up of these same horrible pay practices. Businesses self-inflict a belief that they have to pay exorbitantly for their talent. They too often construct pay packages for potential new executive hires based on the executive’s current pay, current job title and relationships (i.e. who they know), rather than a proven, relevant track record. In the proper stewardship of their assets and future, are these businesses making prudent decisions?
Too many leaders themselves have come to see their relative pay packages as a measure for competitive score-keeping rather than a proportionate reward for real accomplishment. In a growing circle of executives, compensation is a measure of ego, not performance. Why else would they expect multiple millions for, in some cases, tanking their enterprise? Consider the examples of some leaders of larger financial services firms. Do they really believe that if we tie their pay to their performance and to the appreciating value of their stock, rather than providing immediate elevated cash payouts, they would not be able to feed their children or make their house(es) payments?
Three great compensation questions to ask ourselves, our boards, our CEOs and our consultants are as follows: Q1. Have you ever assessed your compensation structure and determined that people are overpaid? Q2. When you hire a new executive and pay a competitive base compensation, for what do you expect this base compensation is being paid? Q3. If you paid a key executive a $1m bonus today and he/she died on the way home, would the business open and run profitably tomorrow? Are they irreplaceable?
If we are paying leaders the same for performance and non-performance, for growing a business or tanking a business, how does it all end?
Knowledgeable, skillful leaders with the right attitudes do grow, adapt and flourish. Mediocre or lesser leaders can endure for a time. Some deftly move to a next company and a next big payday before their business implodes (allowing the roof to fall on their replacements). Still others delay their own judgment day by artfully laying faults on the economy, materials costs, government regulation, unfair competition and even their own hand-picked lieutenants. They may be rescued in time by a next employer who assesses their pedigree solely on their current title, pay package and relationships. In any case, they may position themselves to escape the consequences of failure and find another new beginning.
But many of the less competent leaders do not escape failure. Some cannot mask their shortcomings or time their escapes. Others blindly allow their strengths to mutate into flaws. For example, broad and expanding skill and knowledge, when coupled with overconfidence and success, can decompose and breed arrogance. Further, the drive for ever greater compensation can mutate to runaway greed and trampling organization objectives and values.
Not all fatal wounds are self-inflicted. Leaders who believe that they have no deficiencies will not cultivate the respect of their team or peers (unless, of course, the leaders really are perfect). If they attempt to build a protective wall with a cadre of “yes men,” they may find that that wall can be breached. Decent team members or other stakeholders whose confidence, values and organization commitment are not eroded will stay, fight for the enterprise and expose a charlatan.
The leadership thing is a creation from complex stuff. But let us not make it too complex. We must do a better job of assessing our leaders. We need to appropriately compensate them based on their performance. And we cannot ignore serious shortcomings.
Stan Davis is the Founding Principal of Standish Executive Search, a New England-based firm that advises business owners, executives and boards who are positioning their companies for accelerated growth, change or succession.
Dr. Ed Mazze, Distinguished University Professor of Business Administration at The University of Rhode Island, is a former corporate CEO and Board member, an author and a celebrated former Dean of four graduate/undergraduate schools of business.