Daily Archives: July 15, 2009

If You Really Want To Fix Executive Pay, Decide Who NOT To Pay

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A recent blog post over on the Harvard Business Review site on the issue of executive pay, which stated that whom to pay is more important than how much or how, made a good point — that the fundamental issue is to ensure that CEOs and other leaders make the greatest potential contribution towards building lasting greatness. In the author’s viewpoint, that means you need to be paying the right people.

Furthermore, while a star blue collar worker on a traditional assembly line would be 40% more productive than a typical worker, that performance advantage can be 240% for a star insurance salesman, and more than 1,000% for star workers in more complex jobs such as a computer programmer or an account manager of a professional service firm. This indicates that CEO performance, given the complexity of the job, can have a huge spread.

So it’s definitely important to be paying the right people. But, in my experience, it’s even more important NOT to be paying the wrong people. You can have a star CEO and still have her fail if she’s surrounded by useless blow-hard suck-up yes-men who can do nothing but produce hot air eight to twelve hours a day. Nothing ensures a bad quarter, and ultimate failure, faster than an over-paid, under-performing nincompoop who constantly interjects nonsense, demoralizes the team, blames everyone else for his failure, over-promises and under-delivers to your most important customers, stumbles into meetings late, leaves early, and constantly acts as if the entire company would fall apart without him when, in fact, it would reach entirely new heights. So if you really want success, the first thing you need to do is weed out and fire these bad apples because, then, it will only take one or two star performers to turn a slightly above average team into a superstar organization. Then it won’t matter how much you pay since your superstar team will always be delivering value relative to how much you incentivize them.

How to Govern Well

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archive.

For eight of the ten years I’ve lived in my little community, I’ve been an officer and/or board member of our homeowners association. It’s a thankless job which I cannot be paid for, and has, on the average, cost me somewhere between one-half to one full day of weekly productivity across all these years. Now before you label me as a “condo commando”, I can assure you that this board of directors are not “commandos”: we have seen our middle-class community slip to a lower-middle class one due to homeowners who would rather see this place turn into an industrial park than perform the minimum maintenance necessary to maintain some semblance of aesthetic beauty to their homes. It’s quite pathetic, really, at how much we have to fight uncaring, discourteous people who only seem to have contempt for their homes and community.

At one time we needed to hire a private investigator, so I recommended a friend of mine with whom the Association did contract with. Was this business relationship legal? Was it ethical to enter in to?

Legally, there was nothing to stop the Association from contracting with my PI friend; everything was okay per Florida law. But what is legal is not necessarily ethical, so was this relationship ethical? The answer is “yes”, but it’s because how the relationship was entered in to.

I – as a board member and officer (Vice President) – made full disclosure to the rest of the board of directors that the PI I was recommending is a friend of mine. During the interview process with the full board of directors, the first thing the PI brought up – before even being asked – was that he and I were friends. Again, full disclosure was made.

When it came time to vote on whether to use my PI friend’s services, I did not vote, thus establishing (relative) distance from the decision-making process. I was not able to sway any of the board members in their vote, and that would have been both illegal and unethical too. After some discussion, the rest of the board voted to use my friend’s PI services.

What helped to further create distance between me and the final decision is that, as Vice President, I cannot legally bind the Association to a business contract – only the President can do that. Thus, with this distanced being “forced” upon me by Florida law, the process was further safe-guarded against favoritism.

To me it seems pretty easy to be ethical if you apply two simple tests to any situation: full disclosure and relative distance. Yet time and time again, especially with elected leaders, there seems to be a breakdown of ethics as favoritism guarantees spouses, clients, friends, and relatives are handed sweetheart deals and contracts for services and supplies.

It’s easy to know what is legal: laws are written down for us. Granted, the terminology can be difficult to understand, and contradictions & gaps confusing to comprehend, but all in all we see seem to know what’s legal and what’s not.

It seems that ethics are not very well understood unless they are written down. I continually see ethical failures in elected officials and corporate leaders who – given their experience and education – should simply know better.

Any time you stand to benefit from a decision in which you have some input, either direct or indirect, you need to ask yourself if you’ve provided full disclosure of all relationships and are at a relative distance such that you are not swaying the decision one way or another.

Integrity requires a lot of fortitude, and standing on terra firma sometimes means you’re standing alone, but at least you’ll know you’re in good company.

Norman Katz, Katzscan