I teach an undergraduate ethics course at Princeton University entitled, “Business Ethics and Modern Religious Thought.” Last year’s final exam asked the students to answer this ethical question: “Is CEO compensation just, or just obscene?”
In light of this, I was very interested to read the recent Wall Street Journal article title, “Sprint Adjusts Bonuses:
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Executives Pay Won’t Be Hurt by Costly Apple iPhone Deal.” Apparently, when the performance targets and metrics were put in place for the telecommunications company’s executives, the costly iPhone deal was not anticipated. And without lowering the performance targets, the executives would not have met their performance targets and therefore not received their bonuses.
This is certainly a generous thing for the board to do; whether it is a fair thing for the board to do is another question. It may undermine the credibility of performance based bonus plans. If top level executives are given a free pass when missing performance targets due to ‘things outside their control,’ one wonders, is that same kindness shown to entry level sales reps and other lower ranking employees when the vagaries of tough market or client situations prevent them from meeting their numbers? The article suggested that “a broad range” of other employees “were eligible for the short term compensation plan,” but is unclear what that really means.
I’m a big believer in performance based-compensation plans. Shareholders, executives, and other employees can benefit; but only if these plans
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are ethically and equitably administered. If senior executives are taken care of when unanticipated business decisions negatively impact their performance (and therefore their bonuses), I hope that same largess is shown toward middle and junior level employees, too.
What do you think?
Dave:
We both love business but also understand it’s too often focused on short-term performance. Sadly, public companies that issue quarterly earnings guidance and reports are usually therefore the most short-sighted.
Peter Drucker therefore famously told Forbes, or Fortune, I don’t remember which, during the mid-nineties that executive compensation was like “watching pigs at the trough..” Peter thought no CEO is worth more than twenty times the average salaries at a company. No one ever listens to a prophet until too late and Ignoring Peter’s counsel has been costly to American business.
I am no Occupier but my skepticism of major Wall Street firms soared when a tiny footnote at the end of our annual report detailed how our CEO’s stock options were re-priced seriously downward after the crash of 1987. The rest of us employees, as well as our clients, were not so lucky of course. Compensation committees might leave such “grace” to God while focusing on justice. For recent events at the firm have proven that God, as well as our economy, can still be just, hence the new series entitled “Capitalism in Crisis” in the Financial Times.
All the research shows that intrinsic motivation beats extrinsic motivation. In other words, people should be fairly compensated, and then expected to do their best. Extrinsic motivation (doing things for “extra” money) is corrupting.
By the way, the best single piece that I have seen, which analyzes what is responsible for the explosion in top-executive pay is the following; though it confines its remarks to financial services firms, these firms are what have, so to speak, led the rot: “The Current Financial Crisis: Causes and Policy Issues”, by Adrian Blundell-Wignall, Paul Atkinson and Se Hoon Lee, FINANCIAL MARKET TRENDS (publication of the OECD, 2008)
Another consideration in this debate regarding adjusting execs’s pay but not lower level employees – I have seen and believe in cases where adjustments for execs have been made on an ad hoc basis justified by the fact that their skillset or niche experience is too valuable to let leave the company. This type of retentation justificiation could also be make for less senior staff and I have seen isolated cases of this as well.
Is this “fair” – disparate treatment but “fair”?
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