Maybe pigs really can fly. Maybe hell will freeze over. Today I finally read something in the Wall Street Journal that didn't make me feel like I was trudging through some never-ending serialization of one of Ayn Rand's doorstops novels. Henry Mintzberg's attack on the absurdity of executive bonuses is enough to make me renew my subscription to the WSJ for another year.
Mintzberg is refreshingly blunt. (In fact, he sounds suspiciously like our very own Bill Waddel):
fixing the way bonuses are paid to executives at big public companies. Well, I have my own recommendation: Scrap the whole thing. Don't pay any bonuses. Nothing.
This
may sound extreme. But when you look at the way the compensation game
is played—and the assumptions that are made by those who want to reform
it — you can come to no other conclusion. 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.
Mintzberg isn't the first kid on the block to point out that bonuses might not be the ticket for eliciting outstanding performance. (Check out Dan Pink's talk here, John Hunter's thoughtful posts here, and Mark Graban's take on it here.) He's also not known for his expertise in lean. But his analysis of why bonuses are just plain wrong could come straight from the lean manager's playbook.
As he points out, bonuses are based on several faulty assumptions, among them that the CEO, with a few other senior executives, is primarily responsible for the company's performance. And this assumption is poison to a company:
can success over three or even 10 years possibly be attributed to a
single individual? Where is teamwork and all that talk about people
being "our most important asset?"
More important, should any company even try to attribute
success to one person? A robust enterprise is not a collection of
"human resources"; it's a community of human beings. All kinds of
people are responsible for its performance. Focusing on a few—indeed,
only one, who may have parachuted into the most senior post from the
outside—just discourages everyone else in the company.
Kevin and Bill have written eloquently and often about employees being more than just a pair of hands. A lean company engages their hearts and minds as well. It's refreshing to see Mintzberg addressing this human element — and the effect bonuses have on real people — in the ongoing debate over compensation.
Actually, Mintzberg thinks that bonuses do have an important role to play:
Actually, bonuses can serve one purpose. It has been claimed that if
you don't pay them, you don't get the right person in the CEO chair. I
believe that if you do pay bonuses, you get the wrong person
in that chair. At the worst, you get a self-centered narcissist. At the
best, you get someone who is willing to be singled out from everyone
else by virtue of the compensation plan. Is this any way to build
community within an enterprise, even to foster the very sense of
enterprise that is so fundamental to economic strength?
Accordingly, 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.
Community, sustainability, leadership: this sounds suspiciously like lean management. Let's just hope that someone in the C-suite is paying attention.
Debbie says
Thank you, thank you,
It is so refreshing to hear that you are not the only one thinking this way. When I read “we have to pay the bonuses to keep the good people;” I wondered what was wrong with this picture. Were they the good people? We need to remember that everyone plays a part and everyone is important to sustain a successful organization; no matter what the job requirement nor the business.
Have a great day and keep writing.
Paul Todd says
For a cutting-edge analysis of this topic which backs up many of the points here, see Peter Drucker’s “The Practice of Management” from 1954. As much as the world has changed, we need to re-learn some very old lessons.
Adam Zak says
A bonus is nothing more and nothing less than a single component of a compensation package, which may also include base salary, paid-time-off, various kinds of insurance benefits, possibly other nice perks, etc. And it’s no secret, of course, that any form of compensation is open to potential manipulation if a manager or executive and/or her cronies are less-than-ethical in how they conduct business. But why single out and demonize the bonus?
Because, let’s face it, compensation – yes, even bonuses – is what you receive in return for your labor on behalf of the organization which employs you. Some labor is more valuable to the organization, some less so. There are measurements and judgments involved in figuring this out at all levels up and down the organization chart. It’s pretty complex stuff, kind of like figuring out what the actual financial benefit of that last Kaizen event or Six Sigma project you completed REALLY was. How exact a science is that?
If we eliminate bonuses from the compensation package we’re still going to need some way of differentiating the value each individual contributes to the organization. Perhaps this can be accomplished via the salary mechanism, but this just implies a much wider range of salaries. And salaries present the disadvantage of being, typically, fixed for the duration of a year or so. Now of course we could make salaries variable, adjusting them periodically based on someone’s perception and interpretation of the value contribution for each individual. But if we get to that stage I’m thinking that all we’ve really accomplished is simply engage in word play, creating a fixed and “variable” component for salary. Sounds like a bonus to me.
No, the answer isn’t to demonize the bonus. It’s to create a more accurate and transparent way of measuring and valuing the contribution each individual makes to the organization and then rewarding her for that contribution. This is the real challenge which needs to be addressed and, unforunately, Mr. Mintzberg offers us no guidance in this area.
I’ve been in the executive search profession for about 20 years. And not one single new Lean Manager or Director, Operational Excellence VP or Chief Operating Officer I’ve ever recruited has neglected to ask me about my client’s bonus plan for the new positions they were undertaking.
Let him who has never expected or earned a bonus speak now, please. How about you?
Adam Zak, http://LeanRecruiter.com
Martin B says
How is it that America can graduate tens of thousands from business school, but the pool of capable executives is so small that one has to offer colossal bonuses to attract them?
Eric Wade says
I’m sure I don’t need to remind anyone that there are numerous cases of executives triggering their bonuses by making short term changes that may or may not be good long-term decisions. Especially in privately held or closely held companies, where shareholders and boards can be strongly influenced by their top execs, it has been known to happen. An example? How about a top exec trimming labor costs by a few hundred thousand to trigger a few hundred thousand in bonuses for the top execs? What is the net result? The cash flow sometimes can get *worse* while the labor asset is reduced and we all know about the intelligence and experience drain when you remove “expensive” (read, seasoned) labor.
Am I against bonuses? NO FRICKING WAY. But am I against shell games that allow someone to “earn” a bonus? YES.
I believe and will continue to believe until proven otherwise, that a strong and brilliant leader can create and enhance value in such ways that benefit everyone and when they do, their comp plan, all components of such, should be generous. Think of the Director of Operations that increases productivity, morale, and profits while reducing injuries, waste, and costs? Or how about the VP who opens a new market, leading to hockey-stick organic growth? I say pay the hell out of them.
But that’s added value, isn’t it? Much different than what we’ve been seeing with these excess bonuses being paid for execs who have driven off a cliff!
David Dodd says
Dr. Mintzberg’s article describes several flaws that undoubtedly exist in some bonus plans, but his proposed solution – eliminating all bonuses – is all wrong. Rather than eliminating incentive compensation, companies should expand it to include all employees. Mintzberg mentions this alternative, but then dismisses it, because he fears that an inclusive bonus system would simply encourage all empolyees to pursue short-term gains at the expense of long-term business health.
As Mintzberg points out, a poorly designed bonus system can encourage actions that are detrimental to the long-term health of a business. And it is also true that determined employees can often find ways to “game” a bonus system. But with careful planning, these risks can be substantially reduced, if not completely eliminated.
In the early 1990s, a few companies began to practice what came to be called “open book management.” Open book management is based on three core principles. First, financial performance information – in the form of charts, scorecards, and simplified financial statements – is provided to all employees on a regular basis. Second, companies that implement open book management teach employees how to read and understand financial statements, and, more importantly, what drives financial performance in their company. And third, all employees are given a “stake in the outcome” through a bonus system that is tied to the company’s financial performance.
Since the early 1990s, open book management has been implemented by a wide range of companies. When done properly, open book management can help align the interests of managers and employees throughout a company. In a real sense, open book management is visual management applied to the financial aspects of a company’s operations.