Posted by Marc Hodak on February 10, 2010 under Executive compensation | 
AIG’s CEO Robert Benmosche has implemented a forced-ranking system whereby people get a grade from 1 (you’re a star) to 4 (you suck). Only 10 percent of the people can be stars. 20 percent can get a 2 (you’re good). 50 percent get a 3 (you’ll do), and 20 percent must get a 4 (fail). The amount of variable pay one receives would, of course, depend on their ranking.
Some years back, Benmosche heard that GE did this, liked the sound of it, and implemented it at MetLife when he was the boss there. (GE used to tell their bottom 10 percent that they had to leave the firm. AIG can’t afford that attrition, having just gotten rid of its top 10 percent via a government-approved bonus scheme.)
At MetLife, some staffers there “hated” the system, says Mr. Benmosche.
Well, there are three reasons staffers might hate a forced-ranking system:
– Obvious one: People hate hearing that they aren’t stars, even slackers who are obviously not stars, but have been able to hide behind squishy, Lake Wobegon ratings (everybody is above average). Benmosche doesn’t want slackers to hide anymore. Fair enough.
– Less obvious, unless you’re been there: People hate to give honest feedback to anyone who is not a star. Figuring out which seven of your ten people are going to get less than a 2 is a difficult intellectual exercise. Actually giving those seven people the news can be excruciating, especially for the inevitable borderline cases. Tears are not uncommon.
– Frighteningly subtle: Forced rankings can kill teamwork. You’re basically letting people know that if your cube-mate gets a 1 or a 2, you’re highly unlikely to get rated well. You might as well give people swords and shields and throw them into a cage.
A forced-ranking system can change a corporate culture and “help drive consistency across large organizations,” says Ravin Jesuthasan, leader of the talent-management consulting practice for Towers Watson. [Towers Watson did not implement this system at AIG.]
A powerful incentive to make other people look worse than you can certainly change a corporate culture. People will step on each other to get to the top. Managers within divisions will furiously fight to keep their quiet, but competent people from getting trashed in a political “rank and yank” debate. It can get ugly.
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Posted by Marc Hodak on February 7, 2010 under Executive compensation, Reporting on pay |
Like many others in the blogosphere, I have said it before and will say it again: Lloyd Blankfein is a mensch. Except that I say it without sarcasm.
I was invited last week onto one of the networks to participate in the TV game “What will Lloyd get!” or “Do you want to tee (up) a millionaire!” I had another speaking engagement that night, which is unfortunate because I had a sure-fire strategy to win this game. I was going to hear what everyone else said, then go $100 below the lowest guess. Folks, I was willing to go down to zero.
My reasoning is that LCB was too. Blankfein doesn’t need the extra $30 or $40 million that he might be entitled to in a pre-2008 universe. He already has more than he knows what to do with, and he doesn’t strike me as someone who really cares about the extra that he wouldn’t know what to do with. People may want to project their image of insatiable greed onto him, but that’s their problem, not his.
Blankfein’s problem is how does he get himself and his firm off the front pages as the poster-child of finance capitalism run amok. If he can navigate Goldman through these rapids without crashing on the rocks of public envy and political hubris, the firm can go back to printing cash for its shareholders, employees and, yes, the tax collector, in peace. And if Goldman can grow its shareholder value, Blankfein makes out even better. Because while everyone else is deer-staring into the bright lights of tens of millions in bonuses, Blankfein is steadily looking at his personal portfolio of GS shares, realizing that with the ups and downs of the market, his personal net worth is fluctuating by an average of $10 million per day. Trust me, with 3.4 million shares already in his portfolio, Blankfein is really not sweating an extra 100,000 restricted shares this particular year versus being allowed to take care of the stock he has without walking around with a bulls-eye on his head.
Posted by Marc Hodak on February 5, 2010 under Innumeracy, Reporting on pay |
It’s fairly well established that most journalists went into their profession precisely because they didn’t get along well with numbers. They deal better with letters. Except when those letters are numbers. This morning’s Wall Street Journal has this at the top:
Punching the Clock on Super Bowl XLIV
The number of man hours an organization devotes to winning the Super Bowl is (M)–that’s one million in Roman numerals. W1 and WSJ.com for updates.
Uh, M is one thousand in Roman numerals. Remember those dates on movie copyrights, etc. with all those Ms?
Someone no doubt beat me to the punch because one of those updates on WSJ.com was to eliminate any mention of M as a million.
The real innumeracy, however, is failing to mention that it takes the same number of hours to lose a Super Bowl, and almost the same amount to not come close to reaching the Super Bowl.
How is this relevant to executive compensation? Because you always hear about “paying for failure,” as if executives haven’t put in the work for a losing effort, as if it’s outrageous they got anything at all for competing and losing. Granted “pay for failure” is often tagged to bonuses or equity grants when a company underperforms or fails, but that ignores the reality that (a) not every individual in a failed organization failed at their particular job, and therefore deserves no bonus, and (b) many of these “bonus” positions are like brush salesmen jobs, i.e., the bonuses are more like commissions, and even a poor brush salesman deserves a commission on what little he sells.
Posted by Marc Hodak on February 3, 2010 under Invisible trade-offs, Regulation without regulators |
So, Toyota, builder of one of the most dependable machines in history, is being pummeled in the press for a quality problem that can’t quite be isolated. The U.S. government, which is constitutionally incapable of keeping its nose out of other people’s business, is not content to let the horror of bad publicity and Toyota’s legendary engineering do the job of righting things–the politicians have to pile on:
“This is very serious,” (Transportation Secretary) LaHood said at a breakfast with reporters in Washington. “After I talk with (Toyota’s CEO), they’ll get it. We’re going to keep the pressure on.”
Mr. LaHood said Transportation Department officials flew to Japan in December to meet with Toyota executives and remind the company “about its legal obligations.” The agency, he said, “followed up with a meeting at DOT headquarters in January to insist they address the accelerator pedal issue.”
Because, if the senior U.S. transportation bureaucrat didn’t tell them to do it, Toyota would gladly continue allowing the quality issue to fester, destroying seven decades of branding as the highest quality car manufacturer in the world, and killing off customers as an added bonus.
But there is, no doubt, more to this spectacle than meets the eye.
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Posted by Marc Hodak on February 2, 2010 under Self-promotion |
As I ramp up my quest for gurudom (sp?), I’ve been giving more and more talks. A young lady came up to me after my last one, and said I reminded her of one of her very favorite professors, a visiting lecturer from GMU (she went to Georgetown). Russ, Alex, et al, you’re on notice. Tyler, you’re still safe, for now. I have nothing to say about Mexican folk art.
Posted by Marc Hodak on under Executive compensation, Self-promotion |
Bulletin: If you are a public corporation, and you are still using Towers or Mercer as your comp consultant, you are now officially screwed. You are exposing yourself to all manner of legitimate shareholder concerns, and all the attendant publicity.
That is the real message behind Hewitt’s announcement to spin off its executive compensation practice from the rest of its HR consulting business. Hewitt has decided that they don’t want to deal with explaining to increasingly defensive boards how getting $100,000 for advising them on senior management pay is not a conflict with their selling that management $10 million worth of other HR services.
This was probably an easier decision for Hewitt than it would be for Towers or Mercer since Hewitt was not a particularly big player in the executive comp area. All the same, the biggest “in” you can have with a company to whom you are selling your services is a relationship with top management, which executive comp consulting certainly gives you. It’s a difficult relationship to spin off. Hewitt must have determined that, at this point, that relationship was more problematic than it was helpful.
You know Hewitt didn’t make this split out of a lofty concern for governance principles. This is being driven by an emerging consciousness among boards that this is a conflict that no “Chinese walls” can overcome. Boards need excellent, independent compensation advice.
Posted by Marc Hodak on February 1, 2010 under Executive compensation, Invisible trade-offs, Reporting on pay |
The headline is: Bank pay gets boost on the sly.
While the perk angers some shareholders, the reality is that executives at banks and other large companies routinely collect dividends on shares they don’t own.
Let me guess which shareholders:
“People at places like Goldman Sachs are going to reap windfalls in dividends from stocks they haven’t earned yet,” says Tony Daley, an economist at the Communications Workers of America.
The union fought similar payouts at General Electric’s 2007 annual meeting after CEO Jeffrey Immelt was paid $1.3 million in dividends—equal to 40% of his salary—on shares he didn’t own. It lost.
“It makes no sense to pay people dividends on shares they don’t own,” Mr. Daley says. “Shareholders should be outraged.”
No sense? How about this: if management is awarded beaucoup restricted shares, which by definition they can’t collect for a time, their fond hope is for an appreciation of those shares until they vest. And the one lever they most directly control in that appreciation is dividends. Dollar for dollar, the less dividends they pay out, the higher the shares will go. Soooo, if those communications workers prefer dividends, they should push for the holders of restricted stock to get those dividends, too. To eliminate the perverse incentive to chop or hold back on dividends. Which is why boards began awarding dividends on unvested equity, folks.
That part of the rationale was not mentioned in the article. They didn’t ask me.
