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Yash Gupta
Business School Dean

Yash Gupta

Yash Gupta is Professor and Dean of The Johns Hopkins Carey Business School.

Something For Nothing

Wall Street has once again distributed bonuses of about $20 billion--approximately the same as in 2004. However, there is a big difference; these organizations are now losing money and seeking government bailouts, whereas they were making money and creating jobs five years ago. This egregious behavior has even ruffled our usually "cool" president.

The purpose of bonuses has traditionally been to reward performance. The model was to set a relatively low salary but to offer the incentive of a potentially high bonus. This was the way to encourage high performance, and from the employees' point of view, this was a perfectly acceptable compensation arrangement.

In any organization, there are many strata where an individual's work, while necessary, may have only an indirect impact on the overall performance of the organization. Even during these difficult times, bonuses can encourage high performance at these levels and can prevent organizations' losing needed talent. In such cases, distribution of bonuses may be entirely justifiable.

The case is different at the senior-management level. One of the most important indicators of these managers' performance is the overall organizational health. They are supposed to successfully lead their companies through highs and lows by anticipating and preparing for the future. The recent spate of announcements shows that despite the companies' poor performances, senior leaders continue to receive hefty bonuses. Any rational person can see that this has nothing to do with either rewarding stellar performance or trying to avoid the loss of exceptional talent.

The link between performance and reward has been broken. These leaders have developed a mindset that perpetuates the notion of "expecting something for nothing." They feel entitled, even when their companies are losing money and jobs. This problem is inversely related to the effectiveness of an organization's governing board. In many cases, governing boards of corporations fail to adjust the expectations of their management leadership and seem weak. They fail to hold their executives accountable, partly because many board members have secured their seats through the influence of the CEOs, the very people they are supposed to oversee. So it's not surprising when the board members feel beholden to their CEOs, and feel bulldozed.

The solution is to have governing boards that actually hold their CEOs and senior management accountable. The boards need to be important pieces of how companies are run. They must be vigilant and diligent, and recognize their solemn responsibility to the shareholders. Even then, maximizing shareholder value cannot be the only goal. When a corporation's leadership and board members stop scanning the environment on a regular basis and stop learning, stop looking at what their competitors are doing and what the public is thinking, what the political environment looks like--that can be fatal.

By Yash Gupta

 |  February 3, 2009; 2:57 PM ET
Category:  Economic crisis Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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When I worked for a public company back in the 90s, the compensation structure was very much as you said. In fact, performance bonuses were individualized based on the position. So a jr. VP might have 70% of the bonus tied to meeting goals for their area, and 30% of the bonus tied to the company's stock price performance. A senior VP might have the reverse - 70% tied to stock price and 30% tied to specific goals. The CEO, however, had 100% of his performance tied to the stock price - so value created for shareholders was the sole benchmark for his bonus.
Its hard to understand why this kind of fairly simple concept seems to have escaped Wall Street at this point. Bonuses certainy can't be a reward for performance, given the dismal lack thereof. And retention? Is there really an overheated market for high level, poorly performing finance exes? Come on!

Of course, it was these same people who thought it was a great idea to loan tons of money to people without verifying their income or assets and investing in complex instruments they didn't really understand - so perhaps we should not be surprised.

The real question is, when will experience actually teach them something and change their behavior for the future, and how long will their heads remain buried in the sand.

Posted by: mmrader1 | February 4, 2009 3:05 PM
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