February 2010                                                                                                                     Issue 1

BoardWorks International

 

 
 
 
 

TopArticleGovernance in the News

 

 

Board WorksPoliticians and regulators around the world continue to focus attention on the vexed issue of executive bonuses, particularly those paid by companies receiving extensive taxpayer support. To date the debate in the public domain has tended to be on the quantum of the bonuses rather than on their actual existence. Now Professor Henry Mintzberg, a leading thinker on a wide range of organisational performance and management issues has raised a more fundamental issue. "The problem isn't that they (bonuses) are poorly designed. The problem is that they exist [at all]."[1]

 

In Mintzberg's estimation "...the system simply can't be fixed. Executive bonuses-especially in the form of stock and option grants-represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy. Get rid of them and we will all be better off for it."

 

While the language might seem extravagant (and there is more of it in Mintzberg's article) his analysis is sound and hard to refute. His argument reinforces and extends the case we have made ourselves in Good Governance. There is neither well founded theory nor empirical evidence to support the value of executive bonuses.[2]

 

For Mintzberg, whose comments apply to high end corporates (the awarding of bonuses to executives in non-commercial environments is surely even more flawed), the payment of bonuses is based on the following faulty assumptions.

 

1.      That a company's health is represented by its financial measures alone - even better, by just the price of its shares. Wrong. Companies are far more complicated than that. Corporate health is significantly represented by the various factors that make up 'goodwill' (e.g. reputation, brand value, culture, etc.). Focusing on financial measures is a convenient substitute for executives who don't know what else to do - including how to "...manage more deeply". Such executives, Mintzberg says, can have a field day reducing measured costs by cashing in on that goodwill (e.g. by cutting back on maintenance and customer service, downsizing experienced staff and the like).

2.      That performance measures, whether short or long term, represent the true strength of the company. Wrong. Even though the remuneration industry's 'design' response is to advocate for the use of longer-term performance measures Mintzberg says, "...I defy anyone to pinpoint and measure such performances in any serious way and attribute it to one or a few executives." What is a relevant time period given the natural momentum of a company and the time it takes for good decisions (perhaps made by a previous CEO) to kick in?

3.      That the CEO, with a few other senior executives, is primarily responsible for the company's performance. Wrong. In something as complex as the contemporary large corporation how can success over any reasonable period of time possibly be attributed to a single individual? As Mintzberg suggests, in explaining a company's current performance "...history matters, culture matters, markets matter, even weather can matter." Sometimes it is simply a matter of a CEO (whether by good fortune or effective manoeuvring) being in the right place at the right time. Mintzberg states the (usually unstated) obvious: all kinds of people are responsible for an organisation's performance.

 

This article is a must read for anyone interested (for whatever reason) in executive compensation. To further pique your interest Mintzberg also says:

 

 "...if you do pay bonuses, you get the wrong [CEO] in that chair. At the worst, you get a self-centered narcissist. At the best, you get someone willing to be singled out from everyone else by virtue of the compensation plan."

 

 "...executive bonuses provide the perfect tool to screen candidates for the CEO job. Anyone who insists on them should be dismissed out of hand, because he or she has demonstrated an absence of the leadership attitude required for a sustainable enterprise."

 

"All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit."

 

By the way, Mintzberg's conclusions?

 

"Eliminate bonuses. Period. Pay people, including the CEO, fairly. As an executive, if you want a bonus, buy the stock, like everyone else. Bet on your company for real, personally."

 

 


[1] Henry Mintzberg. "No more Executive Bonuses". Wall Street Journal, 30 November 2009 (Downloaded 15 February 2010 http://online.wsj.com/article/SB10001424052748703294004574511223494536570.html).

[2] Graeme Nahkies and Terry Kilmister. "The Emperor's New Clothes: Testing the 'Fabric' of Performance-based Remuneration for Chief Executives." Good Governance, Number 69 (May-June 2009)

BoardWorks International is a specialist governance effectiveness consultancy dedicated to assisting governing boards to provide effective strategic leadership to their enterprises and to fulfil their fiduciary and stewardship responsibilities to their stakeholders. It is also our aim to make 'board work' a satisfying and enjoyable experience for all who serve on or provide support to, governing boards.