The Salary Sage

Bonuses Continue to Get Hammered in the News

A couple of months ago I described why all the hysteria about management bonuses was a smokescreen and a red-herring (pick your annoying anachronistic metaphor). Now, I am compelled to weigh in again in light of recent developments.

This time, the spotlight of shame has shifted from the ex-Merrill Lynch CEO (John Thain) to the villains at AIG. Their decision to pay $165 million in bonuses, most if not all of which will come out of TARP funds, has cast them in a very poor light. And as often happens when hysteria permeates public opinion, people aren't interested in being confused with facts when it is so much more fun to vilify and accuse. After many months of being blamed for all the problems, Congress is thrilled to have someone else to blame. Listening to them pontificate about waste and excessive spending is as comical as it is pathetic. Policymakers can always, it seems, be counted on for meaningless posturing when serious action is needed. And the public will respond in kind, fixating on inconsequential and superfluous details

How best to summarize this mess? Well, consider this. Incentives are not extra pay, they are merely another part of pay. And they happen to be the part that a person actually has to earn. Unlike base salaries which are paid merely because a person is able to fog a mirror, you actually have to do something to earn an incentive.

Now if you believe that AIG's incentives were paid to individuals who did nothing to deserve them, then your beef is with the people who designed the incentives, not the people who received them. Conversely, if you believe the recipients of the incentives did something worthwhile, then your beef should be with all the other people who did nothing to deserve a bonus and got paid anyway. Get the point?

So rather than vilify incentives, we should be begging for them. Incentives are contracts that only pay out when the recipients deserve them. Rather than guaranteeing 80% to 100% of a person's pay in the form of a base salary and paying it out for nothing, shouldn't we be guaranteeing far less and demanding performance for far more? Imagine a world where executives and managers received 20% of their pay in the form of a guaranteed base salary, and had to deliver specific measurable results to earn the remaining 80%. I am willing to bet that the same AIG employees who earned $165 million in incentives, earned close to a billion in base salary over the same period. They had to do something to earn the $165 million. They did nothing to earn the billion.

So now congress, in its infinite wisdom, is capping salaries at $500,000 and taxing incentives at 90%. Consider what this means. The executives that the taxpayer is counting on to dig us out of this mess show up to work every day guaranteed to earn $500,000 whether they perform or not. Wonderful. And if someone actually wants to link their pay to actual results, there is no way to do it. Not even the circus would make such a foolish mistake -- at least the lion tamer has a little bag of treats he can give to the animals to keep them from chewing his head off.

My great fear is that incentives will take such a PR hit from all this bad press, that boards and CEOs will shy away from them in the future. This would be a grave mistake.

So, as I said back in February:

...while government regulators clamor for caps on executive earnings and the abolition of incentives, don't get caught up in the hysteria. If the people who are saying these things knew what they were doing, they would never have let this mess happen in the first place. Instead, remember that well designed incentives are a key part of the solution, not part of the problem. They provide clarity and transparency by revealing what a person is expected to do, and what they will earn when they do it. They protect against windfalls and focus on outcomes that are controlled and influenced by each individual. So, when you hear that incentives are being abused and misused, blame the leadership teams and Board Compensation Committees who created the incentives, not the incentive plan itself. After all, if someone walks up to your car and smashes your windshield with a hammer, do you blame the hammer?

Incentives DO Work

Every credible movement has its detractors. That comes with the territory. There is always some clever self-promoter attempting to build their career on the rubble created by destroying the foundation of something credible. In the world of incentives, this has been attempted many times.

The most famous perpetrator is Alfie Kohn. In his book Punished by Rewards, Kohn somehow managed to parlay his dislike for gold stars in elementary school classrooms into a credible philosophy of business management. His writings are more diatribes than carefully considered assessments written from experience (click here for one such polemic). In it, he cites the lack of "a single controlled study show[ing] long-term improvement in the quality of work as a result of any reward system." This he considers to be proof that people don't work for money. While academics like Kohn bemoan the paucity of controlled studies, the rest of us are building incentive plans that work.

    Another famous iconoclast is Steve Levitt (author of Freakonomics). In this video clip, Levitt pontificates about something he knows little about, incentives. It is fun to watch his brain work in response to a thoughtful question on incentives from the audience -- "Uh oh, I don't really know anything about this, but I am the expert and people expect me to answer, so let me stall with this anecdote about Christmas turkeys from my wife's former company while I try to figure out what to say. I know, I'll talk about Google. I have no idea what they do as far as incentives, but I can talk about their corporate culture for a while and dodge the question." Might have been easier to say "I don't have anything useful to say about incentives."

What I have generally found (as the Levitt clip illustrates) is that those who are opposed to variable pay either . . .

1. Are confusing incentives with bonuses (as Levitt does with his turkey example), and/or
2. Are approaching the topic from such an incomplete and/or academic/theoretical perspective (ala Kohn) that they simply don't know what they are talking about (but can convince those more naïve than themselves that they do), and/or
3. Are attempting to make the case that people don't really work for money which, if it was ever true (which I seriously doubt) is an argument holding precious little water these days.

I have never seen a person who is both credible and experienced make a seriously convincing case that well-designed incentives don't work.

Another common misconception aimed at undermining incentives is to infer that they are so complicated and difficult to design that they should be entirely avoided lest you make some egregious mistake and ruin your entire business. In response to that, as I have said repeatedly in this blog, you are much more likely to ruin your business by increasing base salaries indiscriminately than by attempting variable pay. If you make a mistake and increase someone's salary for the wrong reason, you will live with that mistake forever (or as long as they remained employed by you). Whereas, if you screw up an incentive plan, you get to start all over next year and try again. Much more forgiving.

Besides, everything looks complicated to the uninitiated. But to those who have been around the block a few times, it is all rather simple. It is not so much a question of what you do as what you don't do. Kind of like the difference between major league baseball and little league -- kids make catching routine fly balls into a real adventure, while the pros make diving catches look routine. It comes down to economy of motion.

Consider this. If you you watch an experienced sailor in a storm at sea, they don't look all that different from a novice on a placid lake. But let the novice take the helm in a gale and you will quickly see that the old salt is doing more than meets the eye. The novice will come back describing a hair-raising experience (if they come back at all) while, for the old salt, it was just another day at sea (or at the office).

Incentives are no different from any other business practice -- learn from experience, do it right, reap the rewards. Listen to amateurs, screw it up, pay the price. And above all, make up your own mind -- Don't let the pundits do your thinking for you. And if you want to get a crash course on how to build incentive plans right, check out Incentive Plan Builder.

Cutting Salaries, Bonuses, and Benefits

I was recently interviewed by a reporter for the Thomson Reuters' HR Wire (Paula Santonocito) who was researching trends in compensation; particularly those relating to companies reducing pay as a response to challenging economic times. Below are some excepts from her recently published article.

ANALYSIS & PERSPECTIVE

Implementing staff cuts is only one measure companies have taken to reduce costs. Organizations are also cutting salaries, bonuses, and benefits.

A GROWING TREND

In recent weeks, the practice has become more common. Generally, others get wind of these kinds of reductions in connection with layoff announcements. A company will release information about job cuts and provide specifics about other cost-cutting measures.

For example, when department store chain Macy's said it will slash 7,000 jobs, the retailer also announced it is eliminating executive salary increases for 2009, reducing the amount of its 401(k) contribution, and cutting its dividend.

Similarly, when announcing it would cut 1,100 jobs, upscale retailer Saks said it would suspend matching 401(k) contribution and freeze salaries.
And the practice isn't confined to the retail sector.

When announcing it will eliminate 10,000 salaried jobs worldwide, General Motors, the largest U.S. automaker, said it will reduce executive pay by 10 percent, and reduce other salaried employees' earnings between 3 and 7 percent.

Likewise, in connection with announcing it will cut 450 jobs, UK-based luxury automotive maker Jaguar Land Rover, a subsidiary of Tata Motors of India, announced that management bonuses have been eliminated and management salary increases have been deferred.

These are only a few companies that have made headlines for their cost-cutting initiatives.

Perhaps the most noteworthy example, and the one to get the most media attention, relates to bonuses. There has been much debate about whether executives at companies that take federal bailout money should receive bonuses. The argument for bonuses is that they are part of a salary package; the argument against is that these times require sacrifice.

SHARING THE PAIN

Wherever an organization chooses to cut, there should be consistency. So says Kent Romanoff, compensation consultant and founder of IncentivePlanBuilder.com, an online incentive plan design tool.

Romanoff tells HRWire the objective is to create a cost-cutting initiative, but it is also to build a lifeboat, and the message should be "we're all in this together."

However, he acknowledges there are challenges. "The term 'fair' is very much in the eye of the beholder," Romanoff says.

Just as there are different ways to increase pay, there are different ways to reduce pay, he explains. Flat dollar increases or decreases are one way.

Yet, yearly increases are typically tied to percentages of base pay. This method tends to be unfair to someone at the lower end of the scale, Romanoff says. Likewise, when you go to the other side of the equation, the salary reduction mode, you run into the same issue, he says.

Although some argue that the percentage should be the same for everybody, Romanoff disagrees. "I advocate against mindless percentage increases on the way up or down," he says. "I do believe it is mindful for executives to take a bigger hit."

Romanoff sees an "incredibly unbalanced relationship" between what executives are paid and what they actually earn. He tells HRWire we have this inequity built into the U.S. compensation arena, and there is a need to level the playing field.

Click here to view the entire article.

ABOUT THE AUTHOR

Paula Santonocito is a business journalist specializing in employment issues. She is the author of nearly 1,000 articles on a wide range of topics, such as impact of world events on the workforce, recruitment and hiring, retention, HR legal issues, benefits, diversity, changing workforce demographics, and the Internet as it relates to the workplace. Articles by Paula Santonocito have been featured in many global and domestic publications and information outlets, including Thomson Reuters’HRWire; The Wall Street Journal site CareerJournal.com; Expatica HR; AIRS News; Monster.com Office HQ; Online Recruitment Magazine; and others. In addition, her work has been posted at more than 100 web sites throughout the world, referenced in academic and legal publications, and translated into several languages. Paula Santonocitoserves as AIRS News editor, features editor of Online Recruitment Magazine (North American edition), and career editor of SingleMindedWomen.com.

Can a Contemporary Pay Program Motivate 'Millennials?'

 

First it was Gen X, then Gen Y, then the so-called "Tweeners." Now a new moniker has been slapped on the NEW generation that is phasing in while the the Baby Boomers phase out; they are being called "Millennials." Born between 1980 and 1995, they are 80 million strong and are poised to take over the job market (assuming we ever have on again).

The conventional wisdom is that Millennials were raised by overly doting parents who not only spared the rod and spoiled the child, but handed the rod over to the child and then let them beat us with it. As the story goes, they were molly-coddled from birth, grew up feeling entitled to things they did not earn or deserve, have distorted values molded by reality TV, rely on technology to cover their laziness, are too obsessed with themselves to care about others, brook no criticism for their actions because they don't actually make mistakes, and are going to be the world's worst nightmare when they enter the workforce.

The prospect of them becoming the workers of tomorrow has some companies terrified. As correspondent Morley Safer first reported last November, corporate America is so unnerved by all this that companies like Merrill Lynch, Ernst & Young, and scores of others are hiring consultants to teach them how to deal with this irksome generation that only takes "yes" for an answer.

As the parent of two Millennials, I am qualified to weigh in. And I have a completely different take. What a difference a generation makes. And how short our memories are. It seems like only yesterday that similar criticisms and concerns were directed toward Baby Boomers like me. We were spawned in the post-war euphoria of the '50s and knew nothing of the pain and deprivation of the Depression and WWII. We enjoyed unprecedented safety, security and affluence. Our lives were sheltered and privileged. Not having to work from an early age left time to experiment widely and wildly. During the tumultuous '60 and '70's our parents were certain the world was coming to an end. Now it is our turn to wring our hands and fret that our children won't share our illustrious work ethic.

Balderdash. Has anyone out there noticed what a fiercely competitive world has emerged during the last 20 years? Getting into college has become as challenging as getting elected to Congress was when I was a kid (and requires a much more impressive resume). Corporations provide little long-term stability and are ready to jettison any employee in the blink of an eye. Young people work harder in high school than I did in college, and they come out knowing more. And there is so much more to know. The accelerated pace of the world, and the tools that are available to understand it, places an enormous burden on young people to stay current. Yet they take it all in stride since it is all they know.

THE MEASUREMENT VACUUM

And through it all, one thing remains unchanged and has gone largely unnoticed. In our society, there is a strange and abrupt transition that occurs between the last year of college, and the first year of work. For the first 22 years of our lives (more if you go to graduate school), you are measured, assessed, tested, graded, scored, rated, ranked and evaluated. It seems that everything a young person does is tracked, from their IQ to their GPA to their class ranking and more. They get scores for homework, tests, participation, attendance, citizenship, you name it. They grow accustomed to this scrutiny and many thrive on it. They know where they stand, where they fall relative to others, whether or not they are ahead or behind, how they measure up.

Then they graduate college and something very strange happens -- they never get measured again. The GPA and transcript that they worked so hard to compile is forgotten, nobody ever looks at their SAT scores again, their class ranking is irrelevant. They enter the world of work and suddenly objective measures disappear and they are adrift in a world of subjectivity. They struggle to learn what they need to do to advance. They rarely if ever know where they stand. They find themselves at the mercy of bosses who are ill-equipped to offer meaningful feedback. The clear connection between hard work and success is broken. They see co-workers stalled in careers and don't know why. They fear the same might happen to them. They get a crash course in office politics, favoritism, and capriciousness. Their world is turned upside down. The most competitive ones soon learn that money is the GPA of business, the way to keep score, the bottom line. This transforms them. Some get greedy. Others get rich. Many feel conflicted and confused in this new reality.

THE PERFECT PAY PLAN

Which brings us around to the basic question -- Can a Contemporary Pay Program Motivate Millennials? The answer is decidedly, yes. And it doesn't need to be any different from what a well-designed pay program would be for any employee. We all crave clarity and predictability in our surroundings. And that is precisely what a well-designed pay program does. It clarifies:

• What the organization values
• Why we receive a base salary and what we must do to increase it
• What specific outcomes are most important and what we will earn when we produce them
• What the career path is and how to advance

Such a program can provide young people the meritocracy that they crave. It can break the cycle of entitlement that infects the workplace and undermines performance. It can stimulate young people and inspire them to produce their best. It can restore their faith that people more experienced than them understand what they want and have a plan to achieve it. It can make everyone proud to play a role in the success of the business, the success of the economy, the success of the nation.

Remember, Millennials have grown up in a very empirical world where almost everything is instantly retrievable and known. The Internet has seen to that. This makes them more immediate, more fact-based, more pragmatic than we ever were. So if we can provide them with a pay program that makes firm connections between what they need to do and what they will get when they do it, I believe they will move mountains.

Bay Area Healthcare Salary Growth Slows for Third Straight Year

Since 1995, I have been conducting an annual salary survey of the largest hospital in the San Francisco Bay Area. Although the participation varies somewhat from year to year, most years it includes the following organizations:

• Alta Bates/Summit
• California Pacific Medical Center
• El Camino Hospital
• Kaiser Permanente
• Lucille Packard Children's Hospital at Stanford
• Mills-Peninsula
• O'Connor Hospital
• Seton/Coastside
• Stanford University Hospital
• University of California San Francisco Medical Center
• Washington Hospital

Because this survey has been going on consistently for 15 years, it permits an interesting glimpse into trends in health care compensation. The table below shows overall market movement for clinical, administrative and support jobs during each of those years.

YEAR	ADMIN	CLINICAL	SUPPORT	ALL JOBS
2009	2.8%	3.4%	2.8%	3.1%
2008	5.5%	5.6%	4.1%	5.3%
2007	5.6%	7.9%	8.1%	7.3%
2006	4.2%	2.4%	3.5%	3.2%
2005	(1.2%)	(0.3%)	2.8%	(0.1%)
2004	10.3%	13.6%	7.7%	11.5%
2003	1.6%	3.0%	6.9%	3.2%
2002	2.4%	5.6%	2.9%	3.9%
2001	9.8%	12.5%	12.4%	11.9%
2000	2.0%	4.6%	(0.6%)	2.2%
1999	2.1%	2.2%	(0.3%)	1.5%
1998	2.8%	3.5%	2.9%	3.3%
1997	3.0%	2.4%	2.5%	2.7%
1996	4.1%	4.4%	3.1%	4.2%

Even more interesting is the graph of market movement for all jobs. It clearly shows both the volatility of the Bay Area pay market, as well as the recent downward trend. Click the link below to see the graph. Note especially the trend over the last three years.

Download Bay Area Health Care Salary Graph

Bonuses Getting Ill-Deserved Bad Rap

In the panic and chaos surrounding the financial melt-down, common sense and reason have been unceremoniously dumped in favor of a carpet-bombing of accusation and blame. As everyone from executives to regulators to investment managers to government officials emits fusillades of covering fire in hopes of deflecting in-coming criticism and responsibility, the real culprits get obscured while effective business practices get trashed as collateral damage.

The latest victim is the "management bonus" and even President Obama himself is getting in on the public ridicule and scorn. Obama wants to talk to Wall Street executives about a report indicating payments of over $18 billion in bonuses as the economy was in virtual free fall. "It is shameful," Obama said from the Oval Office Thursday calling these bonuses "the height of irresponsibility," Vice President Joe Biden spoke even more bluntly, saying "I'd like to throw these guys in the brig," in an interview with CNBC.

While I have written extensively on my disgust with excessive executive pay (See, Note to Congress -- Convert Executive Pay to Loans, I Admire His Pluck -- But His Timing is Deplorable, and John Thain, Poster Child of Excess), I want to be careful to point out that it is not the practice of paying bonuses or incentives per se that is the culprit, but rather their abuse. It would be foolhardy and narrow- minded to assume that because the same culprits who trashed our economy were paid with incentives, that all incentives are therefore evil, ill-conceived, risky, dangerous, and unsavory. Nothing could be further from the truth. This would be like saying we should do away with mortgages because they were the financial vehicles that created this mess. We still need mortgages just like we still need incentives. The difference is they need to be properly designed, properly administered, and properly managed.

I have personally seen the effect this kind of hysteria and paranoia can have on a business. One of my clients (who shall go unnamed for obvious reasons), until recently, had a Board Chairman who earlier in her career personally observed the wreckage that an ill-conceived incentive plan had on an organization she worked for. From that moment on, she vowed that no company she ever controlled would use incentives or bonuses again. And she adhered to this rigid doctrine for the next 30 years. Her myopic edict did not, however, release her from the realities of the pay market. So in order to compete for talent and retain top executives, she was forced to rely strictly on base salaries. As a result, while all of her competitors had 30% to 50% of pay at risk and could flex their cost based on company performance, she was compelled to guarantee all pay in the form of base salaries. These salaries got paid every year regardless of performance. As performance began to slip, she continued to pay top dollar. Eventually all her best executives departed, seeking positions where they were rewarded for their personal contribution to organizational success. Ultimately, she was left with an expensive leadership team comprised of people who were risk averse, timid, and overly conservative. That organization is now teetering on the brink of failure. Of course, there is much more to their collapse than the absence of incentives, but it definitely played an important role.

So, while government regulators clamor for caps on executive earnings and the abolition of incentives, don't get caught up in the hysteria. If the people who are saying these things knew what they were doing, they would never have let this mess happen in the first place. Instead, remember that well designed incentives are a key part of the solution, not part of the problem. They provide clarity and transparency by revealing what a person is expected to do, and what they will earn when they do it. They protect against windfalls and focus on outcomes that are controlled and influenced by each individual. If you doubt that I am right, ask yourself this simple question -- would you rather the head of your favorite corporation earn all his money as a guaranteed base salary and receive it regardless of what he does or how well he does it, or would you prefer he was guaranteed only a small amount and had to earn the rest by actually performing. I think the answer is clear. The challenge is to properly define "performance" and establish reasonable and appropriate payouts when the performance is achieved.

So, when you hear that incentives are being abused and misused, blame the leadership teams and Board Compensation Committees who created the incentives, not the incentive plan itself. After all, if someone walks up to your car and smashes your windshield with a hammer, do you blame the hammer?

John Thain -- Poster Child of Excess

Less than two months ago (Dec 10, 2008), I excoriated Merrill Lynch CEO, John Thain, for having the temerity to go before his Board of Directors requesting (demanding?) a $10 million bonus for successfully negotiating an 11th hour merger with Bank of America (see, "I Admire His Pluck But His Timing is Deplorable"). Prior to the inexplicable act, Thain was roundly praised throughout the industry and from within his own company for grasping a life-ring while other companies were foundering. What followed was a fire storm of negative criticism that resulted in the Board denying his request. Everyone agreed that while his actions might have been heroic, his judgment was breathtakingly bad.

It has now been revealed that two weeks after his own bonus was denied, Thain paid Merrill Lynch staff $1.4 Billion in bonuses. And he did this three days before the deal with B of A was official. Experts speculate that Thain, anticipating that the conservative leaders at B of A would deny such payouts, took it upon himself to rush them through on December 27th when normally they wouldn't have been paid until late January. By then, he surmised, B of A would be firmly in control and such payouts would be impossible.

When Thain approved these payouts, Bank of America had already received $10 billion in federal bailout money ear-marked specifically for the Merrill Lynch deal. So, in one sweeping act, Thain personally appropriated more than 10% of the taxpayer dollars expected to fund loans and stimulate the economy and paid it out in employee bonuses.

As if this news wasn't bad enough, it was also revealed yesterday that Thain spent well over $1 million dollars of Company money earlier in the year to redecorate his office. Click here to see what he bought.

What is truly fascinating about all this is what emerges when you attempt to read between the lines. Consider the fact that thousands of Merrill Lynch's employees receive most of their annual pay in the form of incentives. Had Thain not pushed to pay them, they would have taken a much deeper pay cut than the 10 or 15 percent that so many others have suffered. Consider also that by the time these bonuses were paid, many top ML employees had already abandoned ship to join other firms. To Thain, those that remained had demonstrated loyalty and resolve to see it through. And lastly, Thain knew that the vastly different corporate culture at B of A would deal a crushing blow to his loyal staff.

Thain must have known that B of A would ultimately discover his bold act, yet he did it anyway. Is it possible that Thain is not merely a corporate villain, but also something of a hero?  As always, such judgments depend on which side you are on. To B of A, Thain is the poster child of the failed economy. He is also the ideal person to deflect any blame that B of A executives might have for entering into a bad deal that ultimately led to them losing 80% of their stock value. To many ML employees, Thain is a selfless leader who ultimately sacrificed himself for the good of his staff (although even they acknowledge his many flaws).

It is no coincidence that the revelation about Thain's office shopping spree was exposed on the same day he was fired. With the sharks circling, B of A new a little blood in the water would speed up the attack. It worked so well that the whole sordid mess ended up as a feature story on the august and respected Jim Lehrer News Hour on PBS. Such is life in the cut-throat world of high-stakes corporate America where the name of the game is draw first and shoot straight.

People it seems, especially under duress, can be counted on to exhibit predictable frailties, lapses in judgment and false heroism. Twenty five hundred years ago, the Greeks had already assigned this tendancy a name -- they called it hubris; excessive pride, unfounded self-confidence, and arrogance. It has always led to a fall, then, as it does now.