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Fixing corporate bonuses the college-football way

Lisa Larson
Lisa Larson is the founder and president of Larson & Partners, LLC. When she is not helping companies optimize the business results delivered from their IT projects, she can be found watching football.

Following a year of corporate-bonus outrage and heated discussion around executive pay, we now have a federal "compensation czar," Kenneth Feinberg, determining what is "fair" compensation for top executives at government-assisted firms. While many business leaders insist that firms can only attract and retain the best talent with generous -- or more than generous -- pay and bonuses, the truth is we have no common standard for defining what comprises the "best talent."

Vikram Pandit, the CEO of Citigroup, for example, has been profiled extensively, with no solid conclusion on whether he is a talented leader or a terrible one. Robert Benmosche, who appointed the new CEO of AIG in August 2009 with a very large, Feinberg-approved pay package, said, in response to criticism, " The money is about what I am worth, and what my job is worth to be your leader. "

What's missing from discussions on executive compensation is any consistent set of criteria to measure performance. I believe the Bowl Championship Series (BCS) rankings system, which determines Division I college football post-season play, offers a reliable model for sorting out those who deserve rewards and those who don't.

How does it work? For those who aren't raving football fans like myself, here's how the system works. It offers a weekly ranking of teams, based on three main factors: the Harris Interactive College Football PollSM, the USA Today Coaches Poll, and complex computer-generated rankings drawn from six separate models.

In other words, two-thirds of a team's ranking is determined by human opinion. But the human opinion here is not generated by just any folks, like armchair quarterbacks or fantasy-football enthusiasts. The panelists who complete the Harris Interactive Poll are former coaches, players, administrators and sports-media professionals; all people who have made their living as experts in various aspects of the game of football. The Coaches' Poll is a jury of one's peers -- a sample of 59 coaches from across all of Division I football.

It is these human votes that take into consideration many of the intangibles, such as good sportsmanship or the loyalty of staff. Coaches are aware of current conditions that can affect a game's outcome, such as injuries to key players, loss of a coach or team member, or even NCAA investigations. Coaching is a tight-knit fraternity; not only do most coaches know each other but many of them have worked together before. They also compete for the best athletes when it comes time to recruit.

The last one-third of a team ranking is based on the six computer models, all of which are based on three core components: winning games; strength of schedule (i.e. how hard are the teams you're playing); and home-field advantage. The computer models do not take into account how large the margin of victory is. The surest way to maintain a high ranking is to execute well against difficult opponents week after week.

So now, just imagine there were weekly rankings of top financial-services executives as determined in large part by former employees, executives, auditors and customers of that industry. "Winning" could be translated from football to finance by looking at loyal customer numbers, with double points given for repeat business and new business with existing customers. "Strength of schedule" could be replaced with financial discipline in making business loans and balancing "mission" with profit motive (a la Freddie Mac and Fannie Mae). "Home-field advantage" could be equated to employee satisfaction and retention.

What is at stake? The BCS rankings largely determine whether and where a team will play in a post-season Bowl game. Post-season play has a huge impact on the conferences, the schools, and the future success of the football team. A Bowl payout is divided amongst all the schools in a conference according to a pre-determined formula, with the participating team usually getting the largest share. TV contracts, ticket sales and Bowl merchandise bring in additional revenue. Post-season bowl game appearances are a huge advantage in recruiting top high-school talent as well as top coaches.

A similar ranking system could be used for the top executives in an industry and this ranking system would serve as a guideline for the distribution of discretionary resources, such as salaries, bonuses, stock options and other perks. The ranking system allows for a disbanding of the "old boys" network in favor of high performers, many of whom will be newcomers, coach Jim Harbaugh at Stanford University being a good example.

Using measurable, quantifiable factors to determine a ranking that dictates resource allocation is not a new idea. Graduate school rankings are published every year and the highest ranking schools charge more tuition and enroll the best students (best students are also determined by measurable factors like test scores, grades, extracurricular accomplishments, writing ability, etc.). Washingtonian magazine publishes a list of Top Doctors in various specialties -- as rated by their peers.

Why would it work? A clear ranking system would, in effect, level the playing field for high achievers in the industry. Executives would be ranked based on true performance measures rather than the dollar amounts of their trades/portfolios or just years of experience. This would, in turn, impose reasonable constraints on how executives achieve their status and the rewards that go with it -- certainly one way to reign in the current excesses of Wall Street.

Lisa Larson wrote previously for On Leadership about what corporate America can learn from college football coaches like Michigan's Bo Schembechler.

By Lisa Larson

 |  November 25, 2009; 10:09 AM ET |  Category:  Sports leadership Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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May I suggest vetting this proposal with business-school students at Boise State, Cincinnati or TCU?

Posted by: mattintx | November 30, 2009 3:50 PM

Maybe I missed this - but why would I want to "rank" a CEO? Is a company just a reflection of its' CEO? Does nobody else, say experienced employees, matter? Does a company exist primarily to reward its' CEO?

Say what you will about these overpaid athletes - at least they are out performing in public view. If they lose their edge, they lose bonus money and are replaced by better talent. When was the last time that happened to a CEO? They routinely get board approved bonuses seemingly unrelated to performance (ex. Pandit of Citicorp).

Moving on, I would suggest that CEO pay NOT be linked to short-term performance. I've seen it too often - "head count" is reduced, supposedly non-essential work is eliminated, companies are made lean and mean; bonuses are distributed, a new management team is brought in to start the cycle again. Eventually you have bizarre concepts like "Employee Enhancement" where the employees are expected to work harder for the same pay, management excepted.

The Japanese (and Chinese) believe in long-term goals - where will their company be in 5,10 20 years? They believe in market share, we believe in outsourcing jobs for short term gain. If their company hits a rough patch, not only will their management take responsibility, they will take a pay cut! Somehow that aspect of their business model does not get much publicity in these essays.

Posted by: shadowmagician | November 30, 2009 9:43 AM

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