There’s a great article in the WSJ from May 20th on executive compensation: (Shell Investors Revolt Over Executive Pay Plan; Marketplace page B1). The article though well written misses the core issue about the importance of the executive compensation debate. Let me tell you, it ain’t about the money! It’s about the effect that Board and executive behavior has on the health and performance of these organizations.
Apparently Shell’s Board approved a plan where the C-Suite executives would get performance-based share compensation if Shell “placed in the top 3 of its peers in a ranking of total shareholder return, based on share price and dividend payouts”. Now there are always two issues when it comes to executive comp. One issue is plan design; does it inspire the proper behaviors in order to insure the long-term health of the company. And the second is execution. So for arguments sake let’s say I agree with the design. So, that’s the plan? OK, fair enough. it’s a goal, and they agreed to it so they all, including shareholders should have to live with the outcomes. Well Shell came in 4th. And the remuneration committee promptly changed the rules, using their “discretion” to award the shares anyway. Their rationale: “Well we only came in 4th by a little bit and the ranking, metrics we devised, didn’t really reflect our performance.” There are so many things wrong with this that I almost don’t know where to begin (But as my business partners will tell you, that never stopped me before)…lets put aside for a moment that the Board has admitted by this action and their statements that they have no idea how to set effective targets or devise metrics that would “reflect” actual performance. Lets instead talk about how this would work on a day-to-day basis and what it means for corporate health and performance. In even a moderately sophisticated performance and compensation plan regime, these metrics, share price and dividend payments, would need to be tied to the operational activities that the executives felt would best move them in a positive direction. Then each successive level of management, middle management, division chiefs, team leaders and line employees would be given their own goals so that there behaviors and actions would be best directed to execute those operational activities. If the management team is smart they have shared these top levels goals with everyone in the organization, and then tied ALL discretionary compensation to the superior achievement of those operational activities at each level. This is how we achieve what Dr. Jeff Pfeffer at Stanford University calls “alignment”. It’s how the guy sweeping the floors in the Albuquerque plant knows why he’s doing it and how cleans floors eventually tie back to total shareholder return. Once we all know what to do, why we’re doing it and what’s in it for me if I do a good job at it, then executives can ask us to run through that last brick wall or take that last hill and know we’ll do it because we understand. In fact this understanding is what drives employees to do it on their own, to exert discretionary effort, so that the organization succeeds.
So, what has Shell wrought for the future of the organization?
Well lets say that the executives, believing that they truly deserve this compensation (WTF?) actually do the “right thing” and pay the other members of the team and on down the line, their promised discretionary compensation as well. What happens next year when my manager asks me to stay late on Friday when I really would rather go drinking? If the goals are not really “goals”, they’re just sort of guidelines and if we get “close enough” we’ll all get paid anyway? I’ll see you at the bar at 5:02, if I hustle maybe 4:59! I like working here, I’ll do what I can, but I’m not going to bust my butt on a consistent basis if I’m going to get paid no matter what.
Now, let’s say the executives do what most executive teams do: Yes, as the CEO I got paid because, well, I’m a genius. But you dumb bastards down in the bowels cost us to come in 4th and heads are gonna roll because we can’t afford to be 4th!! How quickly do you think it takes employees to understand that the management speeches about teamwork, going the extra mile, all pulling together for one goal, etc, etc, are all about one thing? Making sure that executive gets paid no matter what happens to the worker bees. And not to overstate the obvious but what now happens to loyalty, morale and productivity? (Turnover, profits and innovation?)
What has Shell wrought? Classic, lose-lose.
As a CEO for 20 years this type of behavior infuriates me.
To toss in a sports analogy, its like Shell watched all the performance before deciding the point values, that way ensuring the outcomes would be in line with their vision.
ReplyDeleteI share your frustration at the lack of simple understanding the C-level operators have for public perception. It is a long list of companies who underestimate the awareness and intelligence of their shareholders, at their peril.
Simple common sense never seems able to make the climb to the upper floor boardrooms. There are so many solid models for executive compensation strategies that are straight forward, and related to personal performance at the corporate level. I still get a smile from Ben and Jerry's approach that the ratio of highest to lowest paid employee was a factor of 10. I am not sure if this was implemented, or great marketing - regardless it's hard to not admire the approach.