Expert Perspective by Grahall’s OmniMedia Editorial Board
The Saturday, January 23, 2010 Washington Post article “Banks stung by criticism over pay despite recent changes” author Tomoeh Murakami Tse writes: “Wall Street banks thought they had made big concessions to populist anger over large year-end bonuses … But by the end of the week, the firms were facing a president proposing new restrictions on their activities and threatening them with a showdown… The turn of events has alarmed many banking executives, who contend they did much of what was asked of them… but that the continuous stream of anti-Wall Street rhetoric from Washington is prolonging public anger and hampering their efforts to move forward.”
Wait! What? How is public discourse “hampering their efforts to move forward”? Don’t these banking executives remember that “During this earnings season, [they … reported substantially improved results for 2009”?
All that in the face of predictable outrage by lawmakers and the public over bonuses planned and in some cases paid. Perhaps, taking a contrarian view, continuing “anti-Wall Street rhetoric” might further improve banks’ earnings. In fact, it might just be that having forced bank executives and boards stop their persistent “navel gazing” and actually take stock of expectations from the external environment, stakeholder and shareholders was the instrumental change that spurred recovery in 2009.
The fact that these organizations remain perplexed that their token changes (i.e. “much [but not all] of what was asked of them”) didn’t satisfy skeptical lawmakers or the American public is the surprising result. Apparently these executives remain so insulated that they have no idea what folks on Main Street, East Capitol Street or Pennsylvania Avenue are thinking.
Rather than consider all influencers when making compensation decision, companies remain locked in the “competitiveness game” where the rules demand that each company set compensation at a level higher than the next company to retain key talent and maintain a competitive edge. This approach generally fails to directly consider the interests of key stakeholders or the expectations of the external environment, and ultimately pushes compensation up, up, and up. The possible result of this faulty approach will be that the financial services industry and banks in particular, will be stung by a swarm of regulations enthusiastically supported by a vocal, voting public.
It is not impossible to fix the problem. It simply requires a more strategic approach to compensation and rewards structure. Take for example Grahall’s strategic approach to developing a total rewards program. It starts with a view of the business and environmental impacts. As Michael Graham relates in his groundbreaking book Effective Executive Compensation “…the external business environment has an enormous impact over organizations in general and specifically in the development of executive rewards strategy”. The external environment is comprised of the public, government, competitors, and employee unions. Graham continues by saying that this powerful coalition essentially “defines what is out of bounds”. Bank Executives and Boards, are you listening now?
Next the Grahall approach demands a review of key stakeholders. This group includes suppliers, employees, shareholders, partners and customers. As Graham says (paraphrased) in his book: “a company is more than its board and CEO. It is an engine of commerce whose goal is to serve a customer base. .. When board members or executives choose to serve themselves over customers, shareholders, employees, partners, etc, then they have lost their mission.”
It is time for bank executives and boards to understand and address needs beyond their own and thereby be recognized once again as great companies. We believe that if organizations were to follow our model when making key decisions on their reward architecture and in particular the competitive level of their own pay, they would find a very different and more positive reaction from all the stakeholders and in particular the people on all the streets Main Street and who will vote for or against those working on Pennsylvania Avenue and East Capitol Street.
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