You Can’t Escape the Controversy that Surrounds Executive Pay

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Expert Perspective from Grahall

expert perspective telescopeWas it a premonition or simply years of experience that the preface of  Michael Graham’s book published in early 2008 “Effective Executive Compensation: Creating a Total Rewards Strategy for Executives” started with these words: “You can’t escape the controversy that surrounds executive pay.” 

Main Street’s explosive reaction to Wall Street’s executive pay policies makes headlines every day.  The Ides of March brought the news that AIG, having already received nearly $175 billion in bailout from taxpayers, would be paying bonuses to the tune of $165 million, some of which would be paid to the same executives who oversaw the company’s near collapse.  Creating a “perfect storm” of outrage and media attention that has been fueled by the harsh reaction by members of Congress. 

“Contractual obligations” and a “country of laws” were included in the comments by Edward Liddy the CEO of AIG when he attempted to justify these payments.  Additionally, Liddy suggested that AIG would not be able to retain its best folks or attract top talent if executives were concerned that AIG “…cannot attract and retain the best and brightest talent … if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury”.  (Quoted from an article published in The Wall Street Journal).

On March 15, 2009 on CBS’s “Face the Nation”, Bob Schieffer spoke with National Economic Council Director Lawrence Summers and voiced the same question that is on the minds of millions of Americans when he asked where, exactly, AIG’s top talent might go?

Perhaps Bob Schieffer had read the report from SHRM released on February 20, 2009 that said “Less than 12 months ago, surveyed corporate leaders professed repeatedly that keeping their organization’s top talent was their top priority. But… a new global survey shows that the focus of senior managers has shifted from talent retention to cost reduction.” 

So, why such an obvious disconnect?  And, hey, while we are at it, “WHO CAN WE BLAME?”   

THE GOVERNMENT IS TO BLAME
The Obama administration rushed to push through the enormous stimulus package in February with minimal review and reflection.  The fury over AIG bonuses are the unintended and unexpected consequences of this rushed effort

THE BOARD OF DIRECTORS IS TO BLAME
A company’s Board of Directors has the power—and the responsibility—to review and approve the pay contracts for company executives.

LAWYERS ARE TO BLAME
The lawyers wrote the contracts.

CONSULTANTS ARE TO BLAME
These contracts were very likely based on some consultant’s recommendation.

On the other hand, maybe we don’t need to blame a single group for this problem. To tthe total disbelief of Main Street and the average American, we find ourselves at the end of a cataclysmic chain of events driven by ignorance, excessive self interest, short sightedness, and narrow-mindedness, of executives, directors, government and consultants.  Everybody’s to blame.

WHAT’S NEXT

The fallout from this will be sweeping as congress tries to rein in executive compensation programs.  There is no question that the consequences, intended AND unintended will be felt far beyond the corner offices of AIG.  But perhaps, just perhaps, we can find a silver lining here that will help us avoid such issues in the future.  So, regardless of how we got here, we’re here. NOW what do we do?

First we need to accept that, regrettably, companies may need to take short-term, band-aid steps to fix executive compensation programs in light of the troubled economy. This is happening just when we were so hopeful that firms had finally moved away rewarding from quarter-to-quarter thinking. Don’t spend too much time deliberating on these short term fixes though, by the time you’re through the recession may be over.  (We hope!)

But even though quick fixes will be needed, this is a good time to think ahead and take a longer-term view. One of the new tricks you’ll be adding to your arsenal will be planning for the unexpected. Did this meltdown catch your business by surprise?  With proper contingency planning, next time it won’t and in fact you’ll have plans in place for all sorts of things.

Meet the Quants

HR strategy and especially executive compensation strategy is about to change big time thanks to the media storm and the “quants”.  Who are the quants?  It is likely that your HR folks have never had to deal with these guys, but your risk managers have. 

Quants can be pretty cold and dispassionate. They interject a healthy measure of rigor to examination of risk. The word “ruin” does not scare them, but, rather, it is a component of the measurement process. 

HR is about to become laser focused on risk management in every company.  And they will begin to address the following:
· How prepared is your work force to execute the business plan and meet the financial goals? 
· Why attract employees when you can select them? 
· Why just motivate employees when you can mobilize them?

Clearly, the old techniques of surveying, job pricing and benchmarking to determine pay will be in for a big change. Quants will demand that HR take a deeper, more flexible and contingency based approach to
HR modeling.  Given that HR, i.e. the business of people, is subject to more variability than any other aspect of a business, this should be a healthy relationship.

Retaining The Best People

Back to AIG for a moment and what else we can learn from this disaster. So Liddy says AIG needed to pay those bonus lest they lose their best people?  Were those really their best people?  Will they really leave?  Are the best people really the single metric thinkers that respond to direct compensation only?  Sounds kind of Pavlovian.  I was once told by one of these “superstars” that the thing to do was  “figure out what your bonus tells you to do and do it.”  Bonuses paid for excessive risk taking with a short term focus, is what got us into this mess in the first place.  That’s just wrong thinking.  In a bad economy, the only people you risk losing are the best ones. They leave because they can.  Bad economies acerbate “bad turnover”.

It’s time for organizations to change gears. Design reward programs around the BEST people, not the average person and certainly NOT the squeaky wheels. Companies need to start by identifying their best people.  Then ask the best people what enables them to succeed, what they need, what they want and what they like and then deliver Guess what – with that approach a company will soon find itself staffed with the best people. Or, you can raid TARP institutions by dangling cash. Good luck. Email Michael Graham at Michael.Graham@grahall.com

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