Today's Wall Street Journal has a simply brilliant argument by management theorist and guru Henry Minztberg titled "Get Rid of Executive Bonuses." I think it is brilliant because it marries the results of diverse and compelling research from many corners of academia with a concise and logical argument. It also is consistent with Dan Pink's argument I mentioned recently that many of the assumptions beneath the way we run organizations are based on little if any evidence --- but rather are articles of faith. As always, I also love Mintzberg's boldness. The heart of his argument, and you must read the nuances, is that three of the assumptions about the logic for executive bonuses clash with the weight of the evidence:
A company's health is represented by its financial measures alone—even better, by just the price of its stock.
The CEO, with a few other senior executives, is primarily responsible for the company's performance.
Mintzberg then digs into a topic that Jeff Pfeffer and I talk a lot about in our chapter in Hard Facts on "Do Financial Incentives Drive Company Performance? That is, what kind of people does your performance evaluation system attract and what kind does it drive away? Here is what Mintzberg, note how he turns the argument that "if we don't pay these people bonuses, we won't have enough good people." I quote:
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?
Accordingly, executive bonuses provide the perfect tool to screen candidates for the CEO job. Anyone who insists on them should be dismissed out of hand, because he or she has demonstrated an absence of the leadership attitude required for a sustainable enterprise.
Of course, this might thin the roster of candidates. Good. Most need to be thinned, in order to be refilled with people who don't allow their own needs to take precedence over those of the community they wish to lead.
I confess that some his arguments even make me squirm, and I also am concerned because he doesn't really spell out what system might replace bonuses. But his last argument (especially the part I have put in bold letters) really appeals to me, in part, because one of the best definitions I ever heard of an asshole executive is that he or she consistently puts his or her needs and wants ahead of the company and colleagues. Mintzberg is making a compelling argument that the current system seems largely designed to attract and create exactly that flavor of asshole!
Dr. Mintzberg's diagnosis is spot on...unfortunately his prescription is where he goes awry. Given my own focus on risk taking in 'Leadership' and 'Management', his characterisation of executive behaviour as 'heads I win, tails you lose' gambling drives to core of today's economic woes.
Unfortunately, fixing the problem systematically, enduringly and consistently with our values is always harder than the Monday morning quarterbacking. We have opted for a free society and a free market. A free market prices a product or service at the rate 'the market will bear'. The 'big bonuses' was that market price because people with money (shareholders) were willing to pay that to someone who promised (on paper or with charisma) to deliver big returns. The shareholders are just as culpable as the CEOs. If there was active deception and fraud, then that is outright illegal and needs to be actively prosecuted, because then you cross the line from gambling with OPM with their permission, to outright theft.
The problem is that 'bonuses', like other 'performance related' pay. Is a very good compensation principle. It is a self-regulating variable expense structure which means that when the resources are tight, then the cost committments drop proportionately. If you don't make the sale, the salesman doesn't get the pay. If your initiative doesn't deliver ROI, you don't get the pay. In a true 'outcome oriented' MBO business, one could argue that alll pay should be 'bonus' (ie. variable around performance). As Mitzberg highlights, actually measuring 'performance' is a bit of a bear and easily corrupted.
I love Mintzberg's assessments here, but unfortunately I think he too readily dismisses some core business principles to propose a populist claptrap of an over simplistic solution. My own proposal is that more needs to be done by (a) regulators to enforce the rules of the game (which in most cases were transgressed), and (b) shareholders to actively have a say in how their money is used rather than cavalierly handing it over to executives with big promises.
Posted by: Bruce Lynn | December 01, 2009 at 04:59 AM
"A company's health is represented by its financial measures alone—even better, by just the price of its stock."
If i was running a company, and someone told me that, i'd fire them. After yelling at them.
That viewpoint is why employees are treated like dirt, because firing them pumps your stock price up.
it's a despicable viewpoint.
Posted by: John C. Welch | November 30, 2009 at 06:20 PM
I don't think financial performance is the sole indicator of business success and therefore shouldn't be the sole bonus criteria.
I also don't think the CEO (or any top level exec) is primarily responsible for today's success (their strategic vision might make the company more successful in the future.)
What I do think is that the risk reward equation is out of whack. It's not that bonuses are bad - it's OBSCENE bonuses create OBSCENE behavior.
Some balance of metrics and reward would be a good thing. Again, poorly designed they are bad, properly designed they will work. But it's not always easy.
Posted by: Paul Hebert | November 30, 2009 at 02:32 PM
Bob,
I know that you and many other academics are critical of executive bonus systems. I agree with you for the most part, but let me ask a couple of questions for clarification. What about tournament theory, isn't that an evidence-based approach, which predicts (simply put) that the higher the reward, the more effort people will put in (in the tournament, i.e. the internal competition for promotion) and the higher the quality of the candidate that wins? Also, it seems that practically all academics talk about the effect (or lack of effect) of rewards on performance. However, as a consultant, the HR executives who I have spoken to and who are in the process of designing reward programs are mainly concerned about the ability to attract and retain executives, not about performance as such.
Posted by: Nicolay Worren | November 30, 2009 at 01:11 PM