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Golden Oldies: Pay For Performance

Monday, April 17th, 2017

It’s amazing to me, but looking back over more than a decade of writing I find posts that still impress, with information that is as useful now as when it was written.

Golden Oldies are a collection of what I consider some of the best posts during that time.

Money. Everyone’s favorite subject that no one wants to talk about. Especially when it comes to work, as in, “what were you making previously” and “what are you looking for now?”  

Tomorrow’s post focuses on a new law enacted in Philadelphia and New York City that has the potential to change that entire, unwanted conversation, forcing managers/companies to focus on the future, as opposed to history.

Read other Golden Oldies here.

starIn a post last week I asked for opinions on the ideas presented in a series of articles in Business Week on managing smarter but especially one that claims that “treating top performers the same as weaker ones is ‘strategic suicide’” and said I would add my thoughts in a future post.

Bob Foster left two interesting comments (well worth your time to click over and read). Regarding pay for performance he tells the story of a company where everybody from the CEO down all quit.

“Taking on the task to salvage the company, I hired new people that met unusual qualifications: they had to be qualified for the job they were applying for; they had to be unemployed and available immediately; they had to work at sub-standard wages; they had to work while knowing the company could close at any minute; and they had to work without supervision. The team that came together produced a highly successful company, and it was not because of high pay, or performance bonuses (there were none). The team stayed together, and performed, because of mutual respect, trust, appreciation, and consideration—people were ‘valued.’ To me, this is the truest form of ‘pay for performance.’”

I agree that trust was one of the key ingredients in what Bob accomplished, but it wasn’t the only one—or maybe I should say that it needs to be based on fairness and honesty.

Bob says the pay was ‘sub-standard’, but I assume that it was universally sub-standard relative to position and experience. If he had chosen to pay part of the team, say 10% more than their peers, the team wouldn’t have coalesced.

And that is exactly why I disagree with the idea of paying top performers, AKA stars, big sign-on bonuses or higher salaries than their peers.

  • Based on my own experience, 98% of star performers become stars as a function of their management and the ecosystem in which they perform. Change the management, culture or any other parts that comprise that ecosystem and the star may not survive.
  • Just as a chain is as strong as its weakest link there is no star in any sport, business, media, etc., who can win with a team that is subject to constant turnover and low morale.

Consider this common example.

Two people are hired at the same time with the same background, same GP0 and similar work experience, but with the one exception. One graduated from a ‘name’ school and the other from a community college. Starting salary is $50K, but the manager adds a 20% premium to the first candidate’s offer on the basis that she must be better to have gone to that school.

Neither candidate lived up to their potential because the manager made poor choices. In doing so he set both up to fail but for different reasons; one thought she had it made and the other that he was low value.

Merit bonuses fairly given for effort above and beyond acceptable performance levels make sense as long as they don’t come at the cost of developing new talent.

But one problem with ‘pay for performance’ is the pay often comes before the performance, but there are others and I’ll discuss them more Thursday. In the meantime, here are links to five posts from 2006 that give more detail on the trouble with stars.

Stars—they’re in your MAP

More about stars and MAP

Rejects or stars?

Star compensation

Retaining Stars

Image credit: sxc.hu

There were several interesting comments on the original post; check them out.

CEOs are Just Like Us Finally!

Wednesday, September 26th, 2012

http://www.flickr.com/photos/gdsdigital/4963409391/Finally!

The news that we’ve all been waiting for—unless you’re a CEO who is paid relative to your counterparts.

According to new research by Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, and Craig K. Ferrere, one of its Edgar S. Woolard fellows, the whole idea that a CEO will quit if he isn’t paid more than his peers is, to use a technical term, hogwash.

…contrary to the prevailing line, that chief executives can’t readily transfer their skills from one company to another. In other words, the argument that C.E.O.’s will leave if they aren’t compensated well, perhaps even lavishly, is bogus. (…) “It’s a false paradox,” Mr. Elson said in an interview last week. “The peer group is based on the theory of transferability of talent. But we found that C.E.O. skills are very firm-specific. C.E.O.’s don’t move very often, but when they do, they’re flops.”

Surprise, surprise.

For ‘firm-specific’ read culture and colleagues—the same two things that impact any worker’s success.

Flickr image credit: GDS Infographics (click the graphic to see a large version)

Expand Your Mind: Dollars and Trends

Saturday, February 20th, 2010

expand-your-mind

Trends come and go. In its Innovation special Business Week takes a look at leading trends in the business community. Last year was all about execution, but that was then… (While you’re there be sure to check out the Special Reports.)

This year’s emphasis on strategic thinking suggests that, like an individual recovering from a personal upheaval, businesses today are taking stock: reviewing their options, rethinking their strategies, considering new opportunities and innovations.

Another trend is the questioning of CEO compensation, once strictly the province of the board of directors and a few consultants, today it’s everyman’s topic of conversation. Do you think today’s CEO compensation, not just on Wall Street, but in general, is fair and appropriate? Do the incentives work? Do they focus too much on risk taking or do they encourage excessive caution? Read this interview for some excellent insights.

Wharton accounting professors John Core and Wayne Guay have just completed a study on this topic titled, “Is There a Case for Regulating Executive Pay in the Financial Services Industry?

Speaking of fortunes, what do the elder statesmen of Wall Street, guys like George Soros, Nicholas F. Brady, John S. Reed, William H. Donaldson and John C. Bogle have in common with you and me? Surprise, surprise, they all believe that Wall Street needs to be reigned in.

They grew quite wealthy in finance, typically making their fortunes in the ’70s and ’80s when banks and securities firms were considerably more regulated. And now, parting company with the current chieftains, they want more rules.

Another rich guy is John Thain, a trend of his own. Fired from his CEO aerie he has landed on his golden feet at CIT. The man who didn’t see anything wrong with spending $1.2 million renovating his office in 2008 is now responsible for the company that provides financing for SMB, as well as being the third-largest railcar-leasing and aircraft-financing firm in the U.S. In his hands rests much of our future—at least he’s not planning to redecorate.

“This is a company that’s over 100 years old and its core business is lending to small- and medium-sized companies,” Thain said yesterday in an interview. “If we’re going to get the U.S. economy to continue to grow, if we’re going to create jobs, then we need to have this kind of a company do well.”

Our final trend comes from Forbes, famous for the way it slices and dices lists of wealthy people. Its newest look offers yet another one—billionaires under age 40.

Of the current eight, four are from China, three are from the U.S. and one is from Japan.

Image credit: pedroCarvalho on flickr

Leadership’s Future: Teachers are People, Too.

Thursday, January 7th, 2010

I think if I read one more op-ed piece saying the path to improving US education is paved with better teachers I’ll scream.

I’m not saying that good teachers aren’t important, but I don’t believe that teachers are the root of the problems.

Before I start with examples, let me ask you this: how well would you perform if you were

  • terminated for insisting that projects not only be done, but done on time;
  • poorly compensated in comparison to most people with similar education and experience, but in other industries;
  • subject to pressure, tirades, insults and having people constantly go over your head to change your decisions; and
  • shown little respect by your direct reports, indirect reports and management.

Does that sound like an environment that would encourage you to do your utmost? I actually find it surprising that there are as many good, dedicated teachers as there are.

Staying with the current analogy, direct reports = students, indirect reports = parents and management = administrators.

Teaching is like any other form of work—it thrives in a good culture, sags, wilts and gives up in a bad one.

The Dallas Independent School System is a good example of what is happening. DISD is where the teacher was fired at the instigation of parents for being too tough and giving homework—the fact that the kids scored well on tests didn’t count.

It’s DISD that hired new teachers in 2007 with no way to pay them leading to a $64,000,000 budget shortfall that grew to about $84,000,000 in 2008. Their solution was to layoff the teachers—no damage to the administration idiots—maybe they all took math from teachers who passed them rather than lose their jobs.

Then there is the head of technology who was just fired over issues of leadership and nepotism.

Her rise in DISD in a span of three years has been frowned upon by some observers. She was making $87,000 as a division manager in 2006 and ended her career grossing around $140,000.

Some DISD trustees had questioned an organizational chart change that left her husband overseeing the department that she worked in. Her boss was reporting to her husband.

Ya think?

And then there is the saga of Taylor Pugh, AKA Tater Tot, who was growing his hair so he could donate it to a charity that makes wigs for cancer patients—but his suburban Dallas school saw it as reason for in-school suspension for violating the district dress code.

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Back to our analogy. How engaged, productive and innovative would you be working for a company where management performed similarly?

Dallas isn’t alone; it has plenty of company across the country.

So before ranting and blaming the dismal state of US education on teachers, check out your district and state administrations—and then look in the mirror.

Image credit: terrieization on YouTube

Ducks in a Row: MAP and Compensation

Tuesday, January 5th, 2010

golden-handcuffsWhen you’ve coached or written a blog for years you can find yourself answering the same questions over and over, but that’s OK. I’d rather have you drop me a line or use the chat box in the right frame than search for something and become frustrated.

And that’s what happened last night about 10:30.

“Ken” pinged me and asked if I remembered a post that talked about compensation and used a stool as an analogy for the company. He said he’d read it a few years ago and wanted it as part of a presentation for his boss.

No Problem. I’ve used that analogy with clients for years and in posts three times. After I gave Ken the URL he said I should post it again.

I agreed, but added a bit to cover the current situation.

Success is like a 3-legged stool—

Customers / equity-holders / employees

If one leg becomes too long, the stool tips over!

Taking care of the first two is a given, whereas taking care of employees seems to be based on the labor market.

If the market is hot, people are showered with money and perks, as the market cools, so does employee care.

Yes, you can buy people and you can replace people, but it’s very expensive.

In the kind of tough economic times we’re going through people understand when there are no raises and even when their compensation is cut to avoid a layoff.

But if that treatment extends only to workers and lower management, while executive compensation and perks continue, you can count on a steady exodus as business improves.

When the market is tight and companies are throwing cash, stock and perks right and left it’s the wise manager who remembers that people who join for money/stock/perks will leave for more money/stock/perks.

If instead management chooses to

  • do the right thing,
  • treat people fairly,
  • give them interesting work,
  • enable their growth, and
  • satisfy most of their intangible hot buttons

employees will be

  • more productive,
  • innovative,
  • engaged,
  • committed,
  • caring,
  • happier, and
  • healthier.

What more can any boss/company ask?

Image credit: Steve Heath on flickr

Achieving Fairness

Monday, November 30th, 2009

result-of-unfair-treatmentLast Monday we discussed some of the ridiculous reasons that managers use to excuse their lack of fairness and Tuesday we covered what most employees actually mean by ‘fair’.

The main focus was on compensation and that doesn’t begin to cover it.

Unfair treatment from pay to perks to training to strokes to any form of attention will create problems.

Note: I didn’t say ‘might’ or ‘may’ cause problems, but will cause them.

Not just engagement, motivation and retention problems, but also problems with creativity, innovation, initiative (AKA leadership) and especially trust—there won’t be any.

So let’s be clear.

There is no acceptable reason to treat any of your people unfairly.

How do you know that you are being unfair?

I have never met or heard of any managers who didn’t know deep down that they were being unfair.

They may ignore their actions and practice extreme awareness avoidance regarding their reasons, but they know.

The solution is simply to stop; there is no fancy action list; no books to read, no research to do.

You know when you do it, so you’ll know when you stop.

Simple—yes; easy—no. But it has to be done if you want your team to excel.

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Image credit: HikingArtist on flickr

Ducks In A Row: What is Fairness?

Tuesday, November 24th, 2009

ducks_in_a_rowYesterday I told you how monkeys lose productivity when treated unfairly.

Unlike the managers I described in that post, good managers know that unequal pay, but they also know that it’s not just a matter of title/grade.

Not everyone with the same title deserves the same compensation—in fact, to do so would be extremely unfair!

Most companies establish a range for each job and some guidelines within each range, but the guides frequently fall short of what’s needed in the real world.

How do you draw the lines to achieve fairness?

You might think that ‘fair’ is some kind of universal one-size-fits-all yardstick, but all the people I’ve talked with over the years define ‘fair’ relative to themselves and those around them.

Developers working in a small local company didn’t compare their salaries to the developers in IBM, nor to their bosses. They compared them to their peers, i.e., similar job, experience, background, company, industry, location and, lastly, title.

Workers are well aware that every position has a salary range; what they want is for their level within that range to make sense.

The problems arise when the person they sit next to gets X more dollars or a promotion for reasons such as those mentioned yesterday, reasons having nothing to do with skill, experience, attitude or actual work.

This is the critical knowledge that helps you develop working guidelines for your company’s ranges.

Let’s say that ABC Corporation uses a three-level structure in engineering: engineer I, engineer II, and senior engineer and that there’s a $20K range within each level. They currently have five people who are Engineer II. The salary range is $60K – $80K. Of the current people:

  • Judy was recently promoted and is at $62K;
  • Jim, $68K, and Craig, $72K, both have been working for six years. Although Jim has an MBA, he started in sales engineering while Craig had three years’ experience in a specifically needed skill when he was hired.
  • Tracy is making mid-seventies with five years of direct experience; and
  • Kim, at $80K and due for promotion, has a Masters’ and 17 years of experience, 5 of them in ABC’s field.

Although they’re all Engineer II, because the salary differences are based on factual points, not charm, politics, or managerial whim, the group is satisfied that they’re being treated fairly.

As usual, it’s not rocket science, it’s common sense—but I’m starting to think that common sense is rocket science these days.

But fairness is about more than just pay; please join me next Monday for further discussion.

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Image credit:  ZedBee|Zoë Power on flickr

Leader Performance And—Housing?

Monday, October 19th, 2009

mansionSaturday we looked at some incongruous actions and compensation of various CEOs and it reminded me of something I read a year or so ago, so I went looking and found it. Amazing!

I realize that housing is a touchy subject these days, but over the last few decade as houses got bigger and bigger I found it weirder and weirder.

There’s no way to ever convince me that any family or person, really needs a seven thousand-plus square foot house in order to live comfortably—let alone 10,000 and up.

The item I remembered article was  an UpFront blurb in Business Week that I found hilarious.

The research was done by Finance professors David Yermack of New York University and Crocker Liu of Arizona State University and their conclusions casts housing excess in a new light.

The bigger or pricier the house…the greater the risk of lackluster shares.

If [the CEO] buys a big mansion, sell the stock. Many of these guys have been super performers, but at some point that stops, and they reap the benefits.

Seems reasonable to me.

Remember the old saying? Something about boys and the price of their toys.

Seems like the toys’ values are going up, while the boys’ values (and value) are decreasing. (Note: As used here, “boys” is genderless.)

I doubt that the current housing market has changed that particular mindset.

So the next time you go to invest, be sure to plug in the size of the CEOs home when evaluating a company and, thinking about it, the same probably applies to the entire C suite.

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Image credit: Atwater Village Newbie on flickr

Seize Your Leadership Day: More On CEO's And The Economy

Saturday, September 26th, 2009

I have some great links to add to those I gave you last Saturday.

Another article from McKinsey shines a spotlight on managers’ need to “master the disciplines of uncertainty,” because it isn’t going away any time soon.

The market may have torpedoed you and me, but it’s done far less damage to the corner office. “Compensation for top executives at many of the nation’s largest publicly traded firms was essentially unchanged last year, even as the stock market plummeted.” Why are we not surprised?

What has changed? An article in the WSJ Online tells us that COO positions are going the way of the dodo bird because CEOs want to be closer to the action and more involved in day-to-day operations. But Jay Galbraith says,One unspoken reason COOs’ numbers may be falling may be simple fear. As the pressure on CEOs heats up, at least a few simply don’t want such an obvious successor in place.” Again, why are we not surprised?

Economics is one of the few business area that make my eyes glaze over; not from boredom, but from an inability to understand it—believe me I’ve tried. Last week I said that How Did Economists Get It So Wrong? is a must read to understanding what happened to the global economy. For those who wish to dig deeper, two new books on the oft-maligned John Maynard Keynes were reviewed in Business Week (they do understand economics:). “John Maynard Keynes ought to be named Man of the Year. Governments around the world have successfully, if messily, resurrected many of his insights from the 1930s to thwart economic collapse. Foremost is his idea that easy money and government spending can rescue an economy in free fall—with credit frozen, businesses panicked, and consumers paralyzed.” I’m sure this won’t be popular with the free market crowd.

Enjoy!

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Who Leads The Leaders?

Monday, July 13th, 2009

Executive compensation is in the limelight these days—not that it’s ever out. People have always been fascinated by the lavish paychecks of high profile players, whether business leaders or Hollywood icons.

The list of executives paid for non-performance in 2006 pales in comparison to CEO pay in 2008.

We’re all taught the value of hard work, exceeding goals, giving our all, but some have found a better way—a loving Board.

Non-performance bonus money isn’t new; in 2007 Coke had a $2.9 billion noncash charge in the fourth quarter, so they cut 3500 workers and their execs missed their performance bonus targets, but the Board stepped in, giving “…millions of dollars in “discretionary cash awards.”

And no matter how good a leader is, does any performance warrant an average of $144,573 a day for 13 years?

The explanation (excuse?) for these giant pay packages is the same one that kids have been using for generations—peer pressure.

Boards claim they can’t hire the best (AKA biggest name; best negotiator) without these outsize pay packages, but there are hundreds of skilled executives that could be had for less and who would probably do more.

For all the public outcry against outrageous pay there is none against the directors who don’t just approve it, but spend their effort outbidding the other Board.

When are they going to show some real leadership instead of whining and complaining about government interference?

And when will the washed and unwashed start putting the blame where it really belongs?

Little girls are made of “sugar and spice and everything nice;” little boys are made of “snakes and snails, and puppy dog tails;” and many (not all) “leaders” are made of ego and greed and the skill to mislead.

What are Boards made of?

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Image credit: jimrhoda on sxc.hu

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