NOVEMBER 30, 2009
No More Executive Bonuses!
The problem isn't that they are poorly designed. The problem is that they exist.
By HENRY MINTZBERG
WSJ
These days, it seems, there is no shortage of recommendations for fixing the way bonuses are paid to executives at big public companies. Well, I have my own recommendation: Scrap the whole thing. Don't pay any bonuses. Nothing. This may sound extreme. But when you look at the way the compensation game is played — and the assumptions that are made by those who want to reform it — you can come to no other conclusion. The system simply can't be fixed. Executive bonuses — especially in the form of stock and option grants — represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy. Get rid of them and we will all be better off for it.
(snip)
Although these executives like to think of themselves as leaders, when it comes to their pay practices, many of them haven't been demonstrating leadership at all. Instead they've been acting like gamblers—except that the games they play are hopelessly rigged in their favor. First, they play with other people's money — the stockholders', not to mention the livelihoods of their employees and the sustainability of their institutions. Second, they collect not when they win so much as when it appears that they are winning — because their company's stock price has gone up and their bonuses have kicked in. In such a game, you make sure to have your best cards on the table, while you keep the rest hidden in your hand. Third, they also collect when they lose — it's called a "golden parachute." Some gamblers. Fourth, some even collect just for drawing cards — for example, receiving a special bonus when they have signed a merger, before anyone can know if it will work out. Most mergers don't. And fifth, on top of all this, there are chief executives who collect merely for not leaving the table. This little trick is called a "retention bonus"—being paid for staying in the game!
(snip)
Surely, you may be saying, there's a way to fix this system, to make bonuses work for corporate prosperity and economic security.. But I believe that all these efforts are doomed to fail as well. That's because the system, and any proposals to fix it, must inevitably rest on several faulty assumptions. Specifically:
• A company's health is represented by its financial measures alone — even better, by just the price of its stock. Come on. Companies are a lot more complicated than that. Their health is significantly represented by what accountants call goodwill, which in its basic sense means a company's intrinsic value beyond its tangible assets: the quality of its brands, its overall reputation in the marketplace, the depth of its culture, the commitment of its people, and so on. But how to measure such things? Accountants have always had trouble when they have tried, as have stock-market analysts, investors and even potential purchasers of the company. (That's one of the reasons so many mergers fail.) No board of directors is going to have much luck finding that elusive measure, either.
(snip)
• Performance measures, whether short or long term, represent the true strength of the company. For years, the idea was that a company's short-term performance represented its long-term health. The banks and insurance companies have pretty much laid that assumption to rest. So now there is focus on trying to link bonuses with longer-term measures. Well, I defy anyone to pinpoint and measure such performance in any serious way and attribute it to one or a few executives. How do you assess the long-term performance of a chief executive? Some proposals look at three years, others as many as 10 years. But can we even be sure of 10 years? Is a decade long enough in the life of a large company, with all its natural momentum? How many years of questionable management did it take to bring General Motors to its knees?
(snip)
• The CEO, with a few other senior executives, is primarily responsible for the company's performance. What if the CEO was lucky enough to have been in the right place at the right time? When it comes to a company's current performance, history matters, culture matters, markets matter, even weather can matter. How many chief executives have succeeded simply by maneuvering themselves into favorable situations and then hanging on while taking credit for all the success? In something as complex as the contemporary large corporation, how can success over three or even 10 years possibly be attributed to a single individual? Where is teamwork and all that talk about people being "our most important asset?" More important, should any company even try to attribute success to one person? A robust enterprise is not a collection of "human resources"; it's a community of human beings. All kinds of people are responsible for its performance.
(snip)
So, again, there is but one solution: Eliminate bonuses. Period. Pay people, including the CEO, fairly. As an executive, if you want a bonus, buy the stock, like everyone else. Bet on your company for real, personally. Actually, bonuses can serve one purpose. It has been claimed that if you don't pay them, you don't get the right person in the CEO chair. I believe that if you do pay bonuses, you get the wrong person in that chair. At the worst, you get a self-centered narcissist. At the best, you get someone who is willing to be singled out from everyone else by virtue of the compensation plan. Is this any way to build community within an enterprise, even to foster the very sense of enterprise that is so fundamental to economic strength?
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http://online.wsj.com/article/SB20001424052748703294004574511223494536570.htmlPrinted in The Wall Street Journal, page R3
Dr. Mintzberg is a professor at the Desautels Faculty of Management at McGill university at Montreal.
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