{"id":716,"date":"2009-02-19T06:25:20","date_gmt":"2009-02-19T14:25:20","guid":{"rendered":"http:\/\/hodakvalue.com\/blog\/?p=716"},"modified":"2009-02-19T06:25:44","modified_gmt":"2009-02-19T14:25:44","slug":"the-failure-of-ges-incentive-plan","status":"publish","type":"post","link":"http:\/\/hodakvalue.com\/blog\/the-failure-of-ges-incentive-plan\/","title":{"rendered":"The failure of GE’s incentive plan"},"content":{"rendered":"

Whenever a CEO declines a significant chunk of change, as GE CEO Immelt did this past year with regards to his $11.7 million bonus<\/a>, the reaction is predictable:\u00a0 some react positively, feeling that Immelt is in touch with us regular folks, that feels our pain; others are decidedly more cynical<\/a> about Immelt’s motives, or about the capitalist system that made such an ‘obscene’ payment possible.\u00a0 The more sophisticated board observer would recognize that Immelt and the board finely executed their respective prerogatives, with the board proposing and the CEO disposing in one of the few areas of goverance where that is the way it’s supposed to be.<\/p>\n

My perspective is a little different.\u00a0 I’m left wondering, why did the bonus plan fail so badly?<\/p>\n

It failed for two common reasons<\/a> that bonus plans fail:\u00a0 it was based on the wrong metrics, and the pay-for-performance leverage across those metrics was miscalibrated.\u00a0 Immelt’s $11.7 million came from GE’s long-term incentive plan<\/a>.\u00a0 This plan was based on performance against four metrics:\u00a0 earnings per share growth; revenue growth; cumulative return on capital; and cumulative cash flow from operating activities.<\/p>\n

Taken together, these four metrics are a pretty good basket of indicators.\u00a0 But GE’s plan, as is common, does not take these metrics together–it calculates distinct pay-for-performance schedules for each of them individually, and individually half of these metrics would not be expected to closely relate to shareholder value.<\/p>\n

For example, revenues can be bought with extra costs.\u00a0 If a company did this, you would expect to see it in a decline in earnings.\u00a0 In fact, GE just met its maximum revenue growth target, but fell well below it’s minimum earnings target.\u00a0 What do shareholders care about more?\u00a0\u00a0 If one item on the menu is delicious, but the other is poison, is it an OK meal on average?\u00a0 For bonus plans, the answer is often “yes,” as it was in GE’s case.<\/p>\n

So, GE’s long-term plan, suffering from some rather common afflictions, mistakenly created large awards for their managers.\u00a0 Immelt was a mensch for forsaking his portion of the award.\u00a0 The real question is, will he and his board realize what a crappy plan it was that created such an award, and will they bother trying to design something better next time?<\/p>\n","protected":false},"excerpt":{"rendered":"

Whenever a CEO declines a significant chunk of change, as GE CEO Immelt did this past year with regards to his $11.7 million bonus, the reaction is predictable:\u00a0 some react positively, feeling that Immelt is in touch with us regular folks, that feels our pain; others are decidedly more cynical about Immelt’s motives, or about […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":["post-716","post","type-post","status-publish","format-standard","hentry","category-executive-compensation"],"_links":{"self":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/716","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/comments?post=716"}],"version-history":[{"count":2,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/716\/revisions"}],"predecessor-version":[{"id":718,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/716\/revisions\/718"}],"wp:attachment":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/media?parent=716"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/categories?post=716"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/tags?post=716"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}