ICE is addictive and doesn’t solve our problems, so why do we persist?
People need to be paid adequately and fairly as the old adage says a “fair days work for a fair days pay. This is fundamental.
- What is not fundamental is, the remuneration system that promotes greed self-interest and short-term thinking. Interestingly, a complex and expensive executive remuneration industry has evolved over the last 25 years, which has an invested interest in ensuring their industry propagates.
- What is not fundamental is, rewarding people for outcomes that are beyond their control, irrespective of who they are.
- What is fundamental is, people become demotivated when forces beyond their control, impact on what they perceive their remuneration to be.
- What is fundamental is, Australians believe in fairness and our current remuneration gap is not perceived as fair and is widening significantly. In fact CEO’s salaries, of the top 50 ASX companies, since the GFC, are almost 100 times that of the average worker.
- What is fundamental is, Boards and Remuneration Committees on boards need to understand the research and what impacts on productivity in real terms, rather than following the trends and dare I say egos and self-interest.
Research
Numerous research studies indicate a negative correlation with incentive schemes and company performance, productivity and creativity.
The research from London Business School of Economics has demonstrated incentives are not the way of the future, if we want to encourage people’s creativity and innovation in solving complex problems.
The chief analyst of the productivity commission researched the remuneration packages of 75 ASX listed companies. It was found that links between total remuneration and company performances were generally unconvincing. The measures included Earnings per Share, Growth and Return on Earnings.
The Candle Experiment, which is a renowned international experiment on the subject, supports this data. It also demonstrates that the use of incentives were useful, when work was focused and mechanised, for example, the speed of production.
Australian research also states that CEO’s average tenure is up from 3 years to 4.2 years. To get results from the implementation of long term strategic initiatives can take up to six years. So how do we know whom to reward?
A recent Bespoke report on Big Four bank CEO packages & pay out’s states that:
New CEO appointments at NAB and WBC have seen packages reweighted to long-term incentives(LTI). Yet it is interesting to note that the report also states that bonuses are consistently paid above target, and in most cases do not reflect LTI outcomes.
Yet irrespective of extensive research, particularly by our international business schools, our productivity commission, or even applied knowledge of human behaviour, organisations persist with such schemes, that not only don’t add value, but are counter productive. My belief is that the systems have developed a life of their own, partly through a conspiracy of self-interest or ignorance or both. The cost to maintain these systems, consultants, REM specialists, HR resources, REM committee members, conferences, are not being challenged while most other costs are.
Why might you ask? The metaphor that seems most appropriate for Incentives for Corporate Executive schemes (ICE) is because it acts like a drug. The more you have the more you need. You have to ensure supply and costly infrastructures, to support the habit. You have to have voices of authority colluding in the deals. Most significant of all the short-term hit the individual receives, is ultimately detrimental to the organisation and often to the individual themselves. However every addict has a dealer and it is difficult to persuade either, of the benefits of giving up. Also as authorities try to curb the addiction, by implementing more rules, the dealers have created more drugs to choose from, such as AGH.
AGH better know as A Golden Handcuffs
I have worked in three large organisations that have paid good salaries and provided a small bonus if the company performed well financially. The focus was not on a bonus or an incentive scheme, except if you were in sales. There was a payroll infrastructure. There were no grand expectations, yet people worked hard. Golden Handcuffs did not exist and people changed jobs depending on circumstances
So what is a Golden Handcuff (AGH)? I remember one such example of an AGH. A manager left one organisation to develop their career prospects in another company. In the new company, she was paid a marginally larger salary with incentives. Overtime she became bored and was again considering her career options. It became clear when speaking to her manager there were no opportunities for promotion within the business. To entice her to stay they gave her a very significant long-term incentive. (3 years)
She stayed, was no less bored, achieved her stated objectives and even though she wanted to progress her career chose not to, predominately because of the incentives that were offered. This is called A Golden Handcuff.
Irrespective of the choice the employee made, which may have suited her financial objectives, how did providing such an incentive add value to the organisation? How much creativity and innovation, which is a requirement for future growth, was likely to be achieved by giving AGH? How did AGH improve productivity?
AGH is very addictive. Does anyone realise what an addictive process this becomes, when every year you receive another Long Term Incentive. It may go something like this; if I can hangout for another year I can replace my car, or buy a new lounge or go on that trip. Then, of course, what happens when the expectation of the river of gold dries up, which is what is happening in some industries now?
TRC better known as The Remuneration Consultant.
As anyone will tell you, if you have an expert that advises you what is required, it adds more weight to most arguments. I remember at the direction of a CEO, employing an external executive Recruitment Consultant to review executive salaries including his own.
This is a very expensive exercise. I presented the material back to the CEO and he was not satisfied with the result. I was instructed to employ another executive Remuneration Consultant to review the salaries. He also wanted to be involved in presenting why the salaries should be higher to the consultant.
The second consultant came back with higher executive remuneration options, and this included my own salary being significantly higher. This option was what I was to include in my presentation.
Nothing was illegal, nothing wrong with getting two options, nothing wrong with executives getting more money, nothing wrong with everyone having skin in the game, or is there? Unsurprisingly at the same time we were negotiating an EBA ensuring minimal salary increases, for employees, to ensure costs were kept down which of course linked into bonus KPI’s.
There are many questions this scenario can raise and although time has passed and things may have changed, a lot has not changed.
- What has not changed, is the amount of money being spent on ensuring that unchallenged, Corporate Incentive Schemes (ICE) are maintained.
- What has not changed is the effect on a culture, when such inequities persist?
- What has not changed is many people see their total remuneration package as their salary, irrespective of what is espoused. This has been reinforced over a long period of prosperity, in Australia, where people have received incentives year on year.
Does either the internal, and or external, Remuneration Consultant have an invested interest in driving their customers expectations? I think so. They produce a myriad of reports that show what other companies have done, based on their recommendations. Are they in fact, one of the dealers, in the drug trade, that have a vested interest, in keeping their customers addicted? I expect so.
BPG.The Biggest Pot of Gold
One factor that has driven up executive salaries is the salaries being communicated in the Annual Report. It is not necessarily the amount but how executive salaries compare with their peers.
It can be a great bargaining point to drive up salaries. This should not be underestimated and unfortunately is an unintended consequence of transparency.
For example when I was the Director of HR of a company, I was tasked with reviewing all the executive salaries based on the Annual Reports, prior to engaging TBC’s.
Another example to reinforce this point is: I was attending a one-week leadership course at MIT I America in the late1990’s. There were 240 leaders from around the world. One evening I was sitting next to the CEO of an American Bank. I asked the question how much money is enough, as a part of a conversation? The CEO’s patronising reply is imprinted on my memory banks….”It is not how much you make, it is who makes the most. Look at Arnold Schwarzenegger, he is the top celebrity because he makes the most money.”
Another example is it is often an unspoken rule that when an executive leaves, even if it is under a cloud, they receive special dispensations. This is called a Golden Handshake or Golden Parachute. I remember one CEO confiding in me that he always ensured executives were paid well when they leave, because he may be in the same situation one day.
The question I would ask is, how does BPG or the biggest bag of gold, or a pot of gold at the end of the rainbow add to productivity or the long-term wealth of shareholders? How much of a distraction is this to the main game? BPG is a powerful opiate and is very addictive. One should not underestimate its potency.
GBR Get the Bonus and Run.
A problem many organisations are facing is losing a significant number of employees once they receive their bonus or short-term incentive. In fact some organisations are changing the time of year bonuses are being paid. This is to reduce the impact of the number of people exiting their business after the bonus run. One retail business, for example, changed the bonus period to after Xmas rather than before, because they wanted to ensure adequate staff coverage during the busy Xmas period.
Once objectives are achieved and subjective scores on performance are delivered, there is a waiting period to plan the exit and the new job. If we were to do time and productivity studies, how much productivity do you think GBR costs an organisation?
Also with the sole focus on achieving the objectives to get the bonus, how much innovation and creativity is lost? This is the very thing researchers have identified, as improving our future prosperity? Following my drug analogy, it is like I get my fix and now I am out of here perhaps to a more potent fix.
Can we kick the Habit?
In Australia there has been a significant period of “good times” for businesses. The mining boom and government spending certainly buffeted the Australian Economy from the GFC. However, now in 2015 many businesses in the after glow of the mining boom and manufacturing are doing it tough.
Many people are working harder than ever. The short term and long-term incentives, which are set based on such indicators as Earnings Per Share, are changing quickly. So quickly in some instances, that the incentive schemes being produced, are of no or little value to the employees and are becoming a de-motivator. Obviously in industries, like finance, this is not the case, at this stage.
I have given a series of examples, which may not occur in all organisations and have used the drug metaphor to emphasise the pointlessness of the addiction. The question now is what can be done? Have we got an opportunity to kick the habit of very addictive Corporate Incentive Schemes (ICE)?
I believe this may be a point in time in Australia, that for some industries at least, there is an opportunity and willingness to reset our remuneration systems. Boards often understand there is a problem; they just don’t know many alternatives.
However, if boards are willing to understand the research, to explore other opportunities, there is likely to be a way. If we believe in the principle of a fair days work for a fair days pay, we are more likely to review our current approach to remuneration.
To reset the remuneration system the balance of equity also needs to be restored to somewhere half reasonable. What is good for the goose has to be somewhat good for the gander going forward.
If there is a willingness to look at other options, I am not sure that the current Remuneration Consultants should be the advisors as they currently are one of the dealers of the drug trade? What I would suggest is that a group of people, who understand the drug trade, possible participants and other “creatives” outside business, work together, to come up with a creative or even a basic solution to the current addiction.
Executives may resist or even deny there is a problem, while others will admit the addiction. However it is not up to the executives, it is up to the boards that control the dispensation of the drug. It is up to the boards, to become more involved in the activities of their companies they represent. The boards need to take a proactive approach to ensure Shareholders money is spent wisely. They too need to be innovative and creative in their approach to the remuneration of executives and not just rely on the dealers for advice.
