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Marshall Goldsmith
Executive Coach/Author

Marshall Goldsmith

Marshall Goldsmith is an executive educator, speaker, coach and best-selling author. His most recent book is Mojo.

Aligning Rewards and Hopes

A leader in my field, whose work I admire, is Dr. Steve Kerr, former Chief Learning Officer of GE and Goldman Sachs. Years ago Steve wrote a wonderful article called "On the Folly of Rewarding A - While Hoping for B." This article pointed out that people tend to do what they are rewarded for actually doing - not what we hope they should theoretically do. As long as bankers are rewarded for delivering short-term profits, they will tend to focus on short-term profits. When bankers are rewarded for delivering long-term benefit, they will tend to focus on long-term benefit.

I may be wrong but, to the best of my knowledge, few ambitious, young MBA grads go into banking because they are primarily motivated to achieve "long-term health" for the economy. Most go into banking because they want to make a lot of money. If they wanted to help the world achieve long-term health, they would have become medical doctors! This, in no way, means that bankers are inherently immoral or want to do anything wrong. It does mean that bankers will tend to behave in a manner that is financially rewarding. To imagine that bankers will change their behavior without changing their reward system is naïve!

In terms of developing "better" leaders - banks, like any organizations, will need to define what 'better' for leaders actually means. They will then need to provide clear direction on the leadership behavior that is -- and is not -- desired. Leaders will need to receive feedback, not just from their bosses but from all of their key stakeholders. They will need to act upon this feedback and get measured on progress toward positive change in behavior.

My partner, Howard Morgan, and I published a study involving over 86,000 respondents on the impact of various leadership development efforts. The results are hard to debate. Just sending leaders to "programs" or hiring "coaches" won't have much of an impact unless the leaders themselves commit to change, involve their stakeholders in a disciplined way and measure progress toward the desired new behavior.

By Marshall Goldsmith

 |  September 14, 2009; 3:09 PM ET
Category:  Economic crisis Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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All my experiences confirm Mr Goldsmith's conclusions. Growing up in South Africa, my corporate experience and even life as a father bears this out. The South African government of the day only changed it's behaviour because its self interest was threatened. The benefits of maintaining the status quo at the end were no longer adequately rewarded as they had been for over 40 years. Change happened because the benefits (rewards) of staying the same fundamentally deteriorated. Change did not follow on after a miraculous internal personal and collective transformation. It happened because in the end it became too difficult and unrewarding to stay the same. When my son of 7 misbehaves I can hope all I want for a different outcome, even ask and implore, but it is only when consequence linked to follow up, follows expectation that there is a change of behaviour.

Posted by: grant9 | September 22, 2009 3:28 PM
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You can either build fence up to keep your dog from bothering your neighbors or you can train your dog to behave properly so the fence isn't needed. While regulation may seem like the easy answer, all you end up with is a dog who can still behave badly, just within limits.

Marshall's solution to align incentives (and ideally selection and other HR systems) to get bankers to behave properly is the only feasible, long term solution. As we all know, no matter how high the fence, the bad dog always finds a way over, under or through it.

Posted by: marcse | September 21, 2009 3:42 PM
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I don't agree that things can't change. A lot has been learned not only by companies, markets and government but by each person working in the banking industry. It will never be like it was and that' s a good thing - it wasn't a sustainable model from leadership on down (obviously).

Marshall makes a great point that individuals do what they are measured by. It's a concept that needs to play out in practice. The real risk is in matching our values to our work. Each one of us makes that choice everyday with where we choose to spend our time and how. It's time for new choices, new directions and new outcomes.

Posted by: CareersCoach | September 18, 2009 7:38 PM
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I'm sure some improvement can happen with new laws but I don't think we can legislate our way to ethical behavior. I think the ultimate answer starts with leadership as Marshall suggests. Perhaps the publicity & the public outcry over the current state of the banking community will inspire some leaders to drive to results that are more ethical & lead to more long term benefit. (I also believe in Santa Claus & the Tooth Fairy.) If a few leaders do the "right" thing & they get publicity, it might inspire others. There will always be a few who scam the system.
I think another positive action would be for MBA schools to use case studies from some of the most outrageous actions in their values & ethics classes. I guess they would first have to start teaching values & ethics.

Posted by: jimmo | September 18, 2009 9:43 AM
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Dr. Goldsmith put his finger on a lingering problem in global business--incentive mis-alignment. It is amazing the extent to which businesses today, large and small, still make this mistake.

The fastest way to improve a business is to 1) Get the right 'who' in the right 'where,' and then 2) get them doing the right 'what.' Nothing motivates human behavior like economic incentive alignment!
---Geoff Smart, CEO of ghSMART, and co-author of New York Times Bestseller Who.

Posted by: ghsmart | September 17, 2009 5:27 PM
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P.S. I love the idea of accessing older executives that; have the wisdom and perspective that age brings, and no longer have so much personally riding on what they might suggest...I understand this practice is successfully used in other countries with "counselors" up into their 80's.

Posted by: sitserv | September 17, 2009 12:30 PM
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Although having passed away, we can still find sage counsel in the works of Peter Drucker (get a copy of "The Daily Drucker" as a great sampler). Two quotes come to mind; first - "...the public good must always rest on private virtue", and second, "...performing, responsible management is the alternative to tyranny and our only protection against it." It is my belief that the public good can only be realized through the collective works of effective individuals managing the enterprise...and an all-powerful federal oversight can only lead to totalitarian tyranny.

Posted by: sitserv | September 17, 2009 12:23 PM
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Dear Readers - Thank you for your thoughtful and spirited comments!

This forum shows why interactive blogs have value.

In terms of the complexity of some financial tools, I agree that we need very bright professionals to regulate this activity. This type of over-sight would be in the long-term best interest of the banks - as well as the country. One CEO of a large bank that I know was fired because he didn't 'take enough risk' and because his 'numbers' we not as high as his competitors. It later turned out, he was exactly right - and his successor cost the bank billions of dollars. If major banks have to 'play by the same rules' - and have their risk portfolios analyzed by competent outsiders - all would be less inclined to take wild risks that may lead to 'short-term numbers' and 'long-term disaster'.


I am not saying that this is either simple or easy. I do think that it is worth the effort. The are a lot of retired, very patriotic people, who are smart, financially capable and willing to 'pitch in' to help our country when we need it. Why not recruit them? Have then do it for no pay - to remove any potential conflict of interest. We can recruit volunteers for helping people around the world - why not here? We can recruit young people as volunteers (who don't have money). Why not older people (who don't need money)?


Please send in your comments concerning these thoughts.
Thank you again for your interest in my posts!

Posted by: MarshallGoldsmith | September 17, 2009 9:41 AM
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If what these wannabe holders of massive liquid assets get to play with were not so hard to understand, it would be easier to rein them in. They construct some derivative and peddle it to institutions and get rich without actually contributing to society. That's the way it works. When the derivative makes money for those who buy them, nobody obviously gets hurt. Contrariwise, when they lose money, financial institutions teeter on the brink of failure and threaten to take our government down with them. Hence the massive government "investment" in failed banks. Congress should, but probably won't, restrict what financiers buy and sell to stocks and bonds, calls and puts, and leave it at that. Forget the collateralized debt obligations and the credit default swaps. And no loans to anybody without adequate reserves against loss in the lender and an ironclad guarantee that the borrower has a very good chance of paying the money back with interest. Less of a casino, less opportunity for immediate riches, but safer for all concerned.

Posted by: BlueTwo1 | September 17, 2009 2:34 AM
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I agree, however more teeth would be required. More than some sort of Congress thingie or banking self-discipline. In China a senior official was shot. A little overboard but it gets their attention. Here the bankers rule. The law is really weak for scammers, whether CEO's or stock manipulators. Most of the crime goes unnoticed and if they are caught its a few years in a golf like facility. Not bad for the risk-reward ratio. Take the 2008 meltdown. Normally they make out like bandits, but this one took their casino stakes down. However not to worry. The taxpayers came running to the casino doors and plied them with bailout of debt cash. They immediately went back to the tables and scored HUGE. The stock market is roaring and now their bonus are reaching the stars again. I say tax 'em and tax 'em hard like 90%. But it won't happen.

Posted by: Mnnngj | September 17, 2009 1:10 AM
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KILER616s sputtering, virulent hatred for the US is sad. What a grim way to choose to go through life.

I'm not surprised that he would support having congress -- congress! -- regulate free market wages.

Why not have them assign jobs to people at birth and give everyone the same allowance?

Posted by: srenihwon | September 16, 2009 8:46 PM
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Okay....... So who is going to bring congress under control. I didn't elect them to tell me or anyone else how much they were worth or could earn. A sad commentary on declining value place on independence and individual achievement. If you don't like bankers, keep your money in your mattress....

Posted by: Spitfires | September 16, 2009 8:15 PM
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Mr. Goldsmith, with his emphasis on leadership morality ignores the elephant in the room - unregulated financial instruments that have been concocted by Wall Street whiz kids over the last two decades.

Collateralized Debt Obligations, Synthetic CDOS, and Special Investment Vehicles have, in a epidemic fashion, infected the world economy. CDOs were sliced up to create "tranches" of mortgage and credit instruments ranging from low to high risk (toxic assets). The high risk pieces of CDOs are the first to take the fall for losses. Derivatives of toxic assets were resliced to create new CDOs. Rating services such as Moodys awarded undeserved "A" ratings to such commercial trash paper. TARP hasn't worked because no one knows how to value such "assets".

Until President Obama and Congress show the political will and courage to propose and enact fundamental regulation of these commercial viruses, behavioral modification of CEOs is akin to Sunday school for bandits.

Posted by: MillPond2 | September 16, 2009 7:38 PM
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and further more...why is it we treat the "founding fathers" as if they were deities...more like the founding pricks who developed the system which would allow for the cancerous system now in place.

Posted by: kiler616 | September 16, 2009 3:20 PM
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Mr Goldsmith....you are very right in your assertion...CEOs should not get more than three or four times the median income of the company they are at the helm of....but this is a country built on greed and theft(christian principles?)...what you are proposing will never happen.....oh..and you can add genocide and enslavement of a people due to race to that list of "principles" on which our prestigious nation was founded.

Posted by: kiler616 | September 16, 2009 3:16 PM
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If only law enforcement and regulation enforcement could keep pace with behavior. But, alas, 'tis folly. Banking and investment are already thickly coated in this stuff. Walk through any big shop and chances are that a thrid of the conference rooms are filled with little SEC/CFTC/NFA/State Regulator/... auditors beavering away on reams of paper looking for wrong doing. Next door the next Bernie Madoff is cooking new schemes far too large for the little beavers next door to see.

No, one of the best patch to wealth is to use other people's money. That said, one of the best places to get wealthy, legitimately or otherwise, is where people put their money.

It's that simple and it will always be that simple. And it's naive to think that regulation will every make it otherwise.

Posted by: tanakak | September 16, 2009 1:27 PM
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I agree that the regulatory laws have to be given some teeth; people involved have to think they could be prosecuted.

I also think we won't get anywhere with CEO salary until we set right the nation's ethical compass. This summer I witnessed men carrying loaded weapons to town hall meetings. The response from many? Hey its not illegal. This response ignores the damage these guns do to democracy. The same thing is true on Wall St. While it is not "illegal" to arrange the company's workers and business to maximize short term profits so you can justify 100 million dollar bonuses, it has done fantastic damage to the standing of the US at home and overseas. We could do a lot retracting the idea that what's good for the corporate CEO is good for America.

Posted by: realadult | September 16, 2009 1:09 PM
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WMBOYD doesn't know what he's talking about. Stating that Wall Street bankers inherently have higher IQs that govt. regulators is a ridiculous generalization and doesn't place any weight on the fact that some individuals may be motivated by public service rather than salary.

The reason these cases settle is because the various agencies charged with investigating and bringing these cases are funded or staffed at levels that allow actual prosecution, so of course there are settlements.

Also, firms like BoA wouldn't actually use their own, in-house lawyers for this sort of litigation, they'd hire an outside firm...the same firms who would gladly hire the DOJ or SEC attorney they'd be facing off against if the cases ever went to court.

Posted by: blica | September 16, 2009 11:36 AM
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Good ideas and comments about tackling the
excesses. But let's face it. Nothing is going to change. Perhaps a few cosmetic measures without teeth and then back to business as usual. It is the system, and the
system is corrupt.

Posted by: probashi | September 16, 2009 11:25 AM
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Another trip through fantasy land. If you believe that money is not a factor in most doctor's choice of profession, you live in a different world than I do. We have to rely on the free market system because nobody knows how to figure out what people should be paid or what assets are worth. We don't impose a value system on bankers or anyone else because we don't agree on one. One of the big victories of modern life was to get the church out of the business and political world. The problem with banker's pay is to make sure that they actually earn it. That means they don't get rewarded for taking risks unless they actually take the risk. If they do succeed in earning money through making decisions that move our economy forward, they have earned their pay.

Posted by: dnjake | September 16, 2009 11:14 AM
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If you are thinking of a new reward system, you need to think of the negative as well as the positive. The reason that Wall Street keeps doing what it is doing is because imprisonment isn't a punishment to them. Ok, so you go serve a year or two- but when you get out, most of your piles of money are mostly still there. Money is what they want. When they do things that are detrimental to the economy- hit them where it hurts THEM- in their bank account!

Posted by: Burggirl652 | September 16, 2009 11:12 AM
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Including the possibility of imprisonment for undesirable behavior by executives of large financial service companies may have the effect the public seeks. The Oil Pollution Act of 1990, enacted within 18 months after the EXXON VALDEZ oil spill, motivated oil shipping company executives to require their companies to comply with the law often with an aggressive plan to do so. I am aware of at least some oil company presidents and CEOs who assembled their managers for the purpose of planning how to "keep me out of jail."

I believe that criminal provisions must be part of the appropriate regulation to help break the cycle and motivate the leaders to change the culture to one that rewards desired behavior.

Posted by: WmSPeters | September 16, 2009 10:44 AM
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Make money by adding value..by improving productivity, eliminating waste/redundancies, improving process efficiencies..not by outright cheating and misleading..of coz.. you can fool some people for all time and all people for some time..not all people for all time..people can see through cheating..only the loss of credibility has affected the value of the dollar itself..people will definitley look for other safe havens..like gold or commodities..

Posted by: mdsubramonia | September 16, 2009 9:30 AM
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The question should be "with what?" Those on Wall Street easily have IQs 10 points (avg) above those at the SEC or any other Federal Regulator (even a new 1). That's why they make double or triple the income (again, avg.) Those at the SEC after 5 years are there because Wall Street won't hire them. Why do you think (yesterday's paper) the SEC wanted to "settle" with BoA? Simple, same reason they "settled" with Madoff, same reason they "settled" with Computer Associates, or 100s of others. Wall Street usually threatens the SEC, settle or we will publicly humiliate you in open court (make the SEC look stupid...and Wall Street has the "smarts" to easily do that).

Posted by: wmboyd | September 16, 2009 8:05 AM
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Why doesn't the Media echo the urgent need for regulation so that we don't have another massive transfer of wealth (i.e. taxpayer assets),to the "failed" finacial sector and the Auto Companies?
Why no word from Congress or the President on a reinstatement of Glass-Steagall and repeal of Gramm-Leach?

Posted by: lionelroger | September 16, 2009 7:30 AM
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I sympathize with the slogan, "focus on long-term, not short-term". I have said similar things myself for a long time, and heard many others say the same thing.

But there is one important problem I think we have all been overlooking: stock market volatility feeds on itself, and makes it unreasonably difficult to focus on the long term.

As an example, remember the old advice that a random pick of stocks from the S&P top 50 would yield profits competitive with managed funds? Once upon a time, that was true. But then we had the 2000 market crash, when people following that advice (and countless simple variations on it) were wiped out.

Meanwhile some of those who focused on short term gains were making money hand over fist. Of course, people didn't notice those who failed (see below about statistical fallacies).

The same thing happened in 2008.

Guess what this is an incentive for! Of course, it encourages people to think of the short term. But the more 'investors' think in terms of short term gains, the more volatile the market, and the more they think of the short term.

We need something to break this cycle, I am not seeing it mentioned in Goldsmith's article; just preaching to banks that they need this "disciplined way" won't do it, if the shareholders are the ones who are really driving the volatility.

Rather what is more likely to break the cycle is a multi-pronged approach:

1) better (more appropriate, not just 'more') regulation -- with funding for the agency enforcing it

2) tax incentives for the stock owners to hold onto the stock for the long term

3) breaking the stranglehold of the collaboration between boards and executives for offering wildly excessive compensation packages far in excess of the free market value for executive talent. NB: these packages tend to reward short term gains instead of long term

4) regulation to stop the false/misleading advertising so rife in the financial services industry: far too much of current advertising takes advantage of the investor's ignorance of basic economics and statistics.

Posted by: Syllogizer | September 14, 2009 9:32 PM
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