“Show me the money!” -Jerry Maguire, 1996
“A feast is made for laughter, and wine maketh merry; but money answereth all things.” -Ecclesiastes 10:19
“Former AIG General Counsel Anastasia Kelly…quit rather than accept a cut in her $900,000 salary dictated by government pay czar Kenneth Feinberg…” -Notable & Quotable, Wall Street Journal, February 20-21, 2010
“CEOs…have long benefited from over-sized financial carrots; some meaningful sticks now need to be part of their employment picture as well.” -Warren Buffett, 2009 annual letter to Berkshire Hathaway shareholders
There has been a lot of recent press coverage surrounding executive compensation. Most of it has focused on allegedly excessive compensation payouts. Primarily paid to big company CEOs. And mostly related to organizations which had suffered massive operational and financial losses. Which were, many of them, bailed out of their red ink by taxpayers.
Populist rhetoric supports massive restructuring of top-level executive compensation packages. The words excess, outrage, criminal, clawback, reform, legislation, curbs - regulation - seem to find their way into most every business discussion.
But a closer look at this somewhat touchy subject reveals that the compensation “problem” may not really be as widespread as it first appears. If we assume for argument’s sake, and it’s a real stretch, that the top 10 senior leaders in each of the Fortune 1000 companies are the core population of this “evil compensation conspiracy,” that presents us with only 10,000 individuals. Hoovers™, the D&B database containing the names of most executives in North America, lists over 85 million company leaders. Meaning that our sample of 10,000 represents only .001177% of North America’s senior business leadership. Even if each of these 10,000 execs had been massively and unfairly overpaid during the last few years, we’re still working with only a tiny subset of the global executive population. So instead, let’s consider executive compensation for the rest of us.
I recruit executives. Typically not at the Fortune 500 CEO level, but, within the Fortune 1000, for senior vice president, vice president and director positions. And also similar leadership teams for middle market and privately held companies of all sizes, including private equity portfolio firms. This is the executive population I know, and here are some things I’ve learned about how the best of these organizations make their compensation plans work for them.
- Pay your executives for what it is you want them to do. This may seem almost too simplistic a concept at first. But how many times do we task our corporate leaders with a multitude of overwhelming and potentially contradictory objectives? Build market share. Innovate with new products. Grow next generations of high-potential managers. Cut costs. Build green sustainability into our products and services. Drive increased sales volume. Improve corporate social responsibility. Streamline the supply chain. Increase shareholder value. And.... So, figure out what things in your business truly need doing, and that when those things get done, it will have been worthwhile. Then decide and clearly communicate this to your executives. Get their agreement and buy-in. And then let them loose to make it happen.
- Pay your executives on the basis of performance against clear and concise KPIs (key performance indicators). Use Policy Deployment to translate your top-level objectives into bite-sized KPIs. Design these to encourage both immediately-necessary results as well as longer-term corporate performance outcomes which will sustain the business as well as enhance its value. These KPIs, and so the related comp plans, do not necessarily need to be uniform across the company but they should be complementary. Different sectors of your business may require different compensation game plans. And no two people will necessarily be motivated by exactly the same rewards package, so don’t be afraid to customize and differentiate. Consider retooling bonus and restricted stock units (I suggest RSUs and not options) to recognize the attainment of shared and not just individual goals. And if targeted KPIs are not met, don’t pay for non- or sub-par performance. Where there is potential for excellent rewards there should also be the risk of smaller paydays (or even incentive-givebacks) as a downside (see Warren Buffet, above). And practice zero-based-budgeting when it comes to incentive plans (though not for base salaries) as each fiscal period, while connected to the long-run, must still stand on its own merits.
- Make sure you have the right executives on board to begin with. Hire only top performers in the first place. Don’t limit yourself to average candidates, but target the very best for positions at each level in your organization. Then pay them very well. Why?
In his article Most Likely to Succeed, Malcom Gladwell cites a Stanford University study which “estimates that the students of a very bad teacher will learn, on average, half a year’s worth of material in one school year. The students in the class of a very good teacher will learn a year and a half’s worth of material (my emphasis added). That difference amounts to a year’s worth of learning in a single year. …And remember that a good teacher costs as much as an average one…”
The same often holds true for business leaders. A “great” leader may not be all that much more expensive than a mediocre one, but will generate results substantially better than a simply average one. If that leader is the CEO or any of the C-level team, you really are going to get pretty much what you pay for.
The leveraging impact of leadership performance differentials becomes significantly more dramatic as the complexity of the job increases. While a team leader on Honda’s power train line in Marysville, OH might be 50% more productive than typical associate, the performance of an “A-player” McKinsey engagement manager working on Boeing’s Asian policy deployment plan could be more than 1,000% compared with a lesser mortal.
As Peter Drucker often pointed out, “Management by objective works - if you know the objectives. Ninety percent of the time you don't.” Be sure you’ve hired an executive who can be insightfully finicky about knowing and selecting the right objectives. And pay her well. Fairly, reasonably and in proportion to efforts and outcomes. But well.
Please, comment with your insights and questions. Also, please let me know about any topics related to executive search and recruiting that you’d like me to address in future posts.
Adam Zak recruits “A” players. Then, in their new executive roles, these talented individuals go on to make their new companies simply excellent. Adam has been using his uncommon expertise to help clients improve their businesses operationally and financially for almost 20 years. He enjoys his work so much that he’d most likely even do it without pay. And occasionally, he does. During each of the past 5 years Adam has conducted one executive recruiting engagement on a pro bono basis. Adam’s new book, Simple Excellence: Organizing and Aligning the Management Team in a Lean Transformation, will be available late-2010, Taylor & Francis/Productivity Press, publisher.
Image: DavidDMuir
Eric,thanks for your input.
I've found that the "A" players I've recruited tend to see themselves as being on a career journey as opposed to having "arrived" at their ideal position. As such, they are continuously improving their skills and broadening their experience. They recognize clearly that their (financial) compensation will always catch up with their expertise. And if not at their present employer, then at the next one. Thanks again for your thoughts. Adam Zak
Nice post.
The discussion about KPI and the Drucker quote about knowing (not knowing) objectives resonates. The Data in "Good to Great" by Jim Collins indicates that compensation is not the key to executive performance. hire the "A" players but know that real "A" players are not usually the highest paid.