On the Possibility of Driving High Performing Talent From the Places We Need It Most

I'm not going to stand here (er, sit here) and tell you that there are no issues with the level and design of executive compensation or the way bonuses were paid at some Wall Street firms.  To use a well-turned phrase from a recent Hay Group missiveon the topic, "incentive plans that focus on the short term, that take no account of risk and that drown rational thought with life-changing sums of money" have certainly proven themselves to be no recipe for success.  But before we leap to paint all incentive pay with the same broad brush of condemnation and send the pendulum swinging too far in the opposite direction, I'd like to suggest that some calm, rational thought about the steps we are taking might be in order.

Geoff Colvin, senior editor-at-large of Fortune, shares some thoughts in a recent article on whether the pay restrictions added to the stimulus bill may create bigger problems than the ones they were intended to solve:

The main reason they'll backfire is that they make pay for performance, otherwise known as bonuses, illegal beyond a modest allowance, yet they permit unlimited pay for nonperformance. An executive may be paid a guaranteed base salary of any size but may not receive a bonus exceeding one-third of total pay. And even that minor bonus cannot be based on profits; the rules prohibit any pay plan "that would encourage manipulation of the reported earnings" of the firm, which is of course what any plan based on profits would encourage. So paying top executives in any sensible way is forbidden.

Colvin's concern: that the net effect of these provisions will be to drive the most talented financial minds away from the institutions who need them the most.  Those choosing to remain will be those content with a comfortable (or comfortable plus) salary and not much upside for producing results.

While it might be somewhat cathartic to put the screws to the financial sector, let's not forget that a strong financial industry is an essential piece of finding our way out of this mess. 

What do you think?

Comments

[Michael Haberman, SPHR]

I think his comments are spot on. IF we reward mediocrity we get mediocrity. But who is to say that is not the plan of the "stimulus" bill. Are they trying to stimulate capitalism? Not doing that. Are they stimulating socialism? Well rewarding mediocrity does that. Just my 2-cents worth.

[E James (Jim) Brennan]

Of course, Congressional rules will be iatrogenic. They specialize in CYA gesture politics, and legislating behavior is right up their alley. Folks who never had to make a payroll can't be expected to understand business. Their advisors from academia or special interest lobby backgrounds don't help much, either.

Not that worried, though, because these ridiculous rules are being applied where high pay has already accompanied non-performance, where the feds are underwriting more non-performance, and where the institutions affected are already quasi-nationalized and will soon be subject to the usual public sector pay compression dynamics. The best and brightest will escape to create superior financial services and thus save the global economy. It will take silly stuff like this to drive truly talented experts away from the failed enterprises where only myopic bureaucrats thrive and into more productive realms where they can freely exercise their skills for universal financial salvation. I hope.

[Darcy]

When you invest in the market place higher risk investments are generally associated with higher returns (because the risk of loss is so high). We're asking people to step into roles where they can be held personally liable if something goes wrong (high risk), and then telling them they don't get the potential of a high return.

I think that a better way to approach this would have been to restrict base pay so that in order to really make money results would be required. This necessitates a careful definition of “results” with a balance between short- and long-term objectives so that one isn't sacrificed to achieve the other. In other words a thoughtful and well designed incentive compensation program may have been the better approach.

[Paul Weatherhead]

Ann,

Not sure this is as black and white as they say it is. Remember these are people taking billions of dollars of federal tax payers' money. If someone is handed tens of billions of dollars of federal assistance, taxpayers have a right to have strings attached. There is a great way to have these compensation restrictions lifted - give the federal bail-out money back with interest.

And if someone is so sure about a better executive compensation system for companies receiving federal assistance, let's see it in detail. This country/world is clamoring for quick solutions. Let's put these better compensation systems on the table for the stakeholders to evaluate. After all, the federal government and the taxpayers are now stakeholders.

Paul

Paul

[Ann Bares]

Mike:

It would seem to be a way to reinforce mediocrity, wouldn't it. But perhaps that is the silver lining in this grey cloud, as Jim suggests below?

Jim:

I'll admit it - I had to look up iatrogenic. According to the American Heritage Dictionary (and for my vocabulary-challenged peers) - "Induced in a patient by a physician's activity, manner, or therapy. Used especially of an infection or other complication of treatment."

I like your hopeful vision - that these restrictions will indeed drive the best and brightest out of the failed institutions into newer, more productive, (likely private) realms where they will effect system salvation. I hope, too. I gotta.

Darcy:

I asked myself the same question - why not restrict base salaries instead of (just) incentives? The answer, I guess, is that the effects of base salaries are more predictable and controllable. And these would be ... bureaucratic inertia.

Paul:

I agree that it isn't black and white, and that taxpayers have a right to attach strings to the use of our money. While I tend to be a free-market gal, I don't necessarily agree with Geoff Colvin that we should simply throw these institutions back to the free market from whence they came - I think some parameter setting is in order. I just want those strings to be more carefully considered and more transparently debated than I think these ones were. Because it is our money at stake.

Thanks, all of you, for the great comments and discussion!

[Joe Rice]

Two quick thoughts: First, who is going to hire these people at there previous pay? Second, why do these firms need them the most? Wall Street has been making money out of money and not offering any real product. I would argue that if these people are really talented, they can make a bigger impact somewhere off the radar.

[Ann Bares]

Joe:

Great to have you join the discussion! Who will hire these people? According to Colvin's article, Deutsche Bank, for starters. My argument (and my title, I guess) for why these firms need them the most is that they are the ones playing the lead role in tanking our economy. But your final point coincides nicely with Jim's (see above) - perhaps the real talent will indeed go elsewhere off radar, where they can "freely exercise their skills for universal financial salvation." Let's hope, eh?

[Nancy J. Hess]

Thank you, Ann, for getting this dialogue in motion.

Quote from your post:
"Colvin's concern: that the net effect of these provisions will be to drive the most talented financial minds away from the institutions who need them the most."

I have heard this concern expressed over and over again, and yet why do we not address the elephant in the room - if these are such talented minds, why are we in this mess? Perhaps they should be driven away. Perhaps we have attracted the wrong variety of talent! How about we pave the way for some new talent with a different set of core values.

I may sound as if I jest, but I am quite serious. When someone criticizes a plan that attempts to address such a huge failure, and points out a flaw that is not a real flaw (because intelligent minds will not set salaries ridiculously high) he is only attempting to obfuscate the real issue (which is that the so called talented minds were not up to the task).

[Wally Bock]

Congratulations! This post was selected as one of the five best business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.

http://blog.threestarleadership.com/2009/03/11/31109-midweek-look-at-the-independent-business-blogs.aspx

Wally Bock

[Ann Bares]

Nancy:

Thanks for joining in! You're right to point to the elephant, but I think we also need to bear in mind that there are many employees at these firms that had no involvement in or proximity to the toxic products that took their employers under. Do we drive out all for the sins of the few? Is that the best way to ensure the safety of our (as taxpayers) investment in these companies?

It may indeed be, as you suggest, that a new wave of talent with a different set of core values is part of the solution. A solid thought.

My point is simply this: Could we all take a deep breath and think carefully about the consequences of the restrictions that have been pushed so fast and hard, to ensure they will truly drive the best outcomes? I want to feel sure that good economic sense, and not just politics, is driving the train.

Wally:

Thanks for the recognition - always an honor. Everyone else, if you aren't already reading Wally's Midweek Review on a regular basis, make it a point to start now. Always worth your while!