What's UP (Weekly, Hot, Applicable Topic Summary - Unbiased Perspective)

Corporate Performance and CEO Bonus Pay

There are few issues in today's business environment that raise employee and shareholder concerns as much as CEO salary and CEO bonuses. This topic is of grave concern, especially in companies that report annual net losses and/or fail to meet their annual forecasts. From the perspective of employees, shareholders, and "average citizens", the concept of a multi-billion dollar company reporting a multi-million dollar loss while its leader(s) receive multi-million dollar bonuses is unsavory. For U.S. corporations that sought federal assistance, the notion of CEOs returning their annual bonus is under serious consideration. Hopefully, more research and analysis (on both sides of the issue) is done before a broad brush elimination of this vital leadership-incentive mechanism occurs.

The Business Case for Intervention - The Need for Change

More consideration must be given to how future CEO bonus pay is determined for three reasons. First, all of the components in CEO salary and bonus pay have not been shared. Bonus pay consists of more than the bottom line corporate results. Second, there is no uniformity or guideline for determining CEO salary or bonus pay (for example, one company may request only a percentage of a CEO's bonus for poor corporate performance, while another company may request a CEO's entire bonus for a bad year - and the former company performance is far worse than the latter company). Third, our free enterprise society has no appetite for limitations which would adversely impact our interpretations or freedoms that a capitalist economy provides. Perhaps, the underlying solution can be found in the organizational behavior of those involved in the process (i.e. corporate board members and the CEO), as well as a review of what are the desired results and behaviors attached to incentive pay and bonuses.

Corporate Accountability

The corporate board of directors is accountable for CEO selection, CEO salary, and CEO bonus pay decisions. The corporate board is also accountable for protecting shareholder investment. Research has shown numerous corporate boards are comprised of CEOs from other companies (but in different industries than the corporate board for which they serve). The time has come for more communication and explanation from corporate boards to address the dynamics of this phenomenon. Communication, or lack thereof, is the primary key for soliciting support, buy in, and acceptance of ALL initiatives in the corporate business environment. Open, honest communication, integrity, and accountability has forged to the forefront as required, expected behaviors and traits of our corporate leaders.

CEO Bonus Pay Components

I am not a CEO or a corporate board member in a for-profit corporation. However, I have conducted extensive research in the area of CEO selection in U.S. for-profit firms. Research has shown CEOs must possess three vital skills; and successful execution of those skills may result in bonus compensation. First, is the ability to provide and communicate vision/direction of the company. The CEO must clearly articulate the organization's mission to employees, shareholders, and the community at large. Second, the CEO must be able to run a multi-billion dollar corporation; hopefully, with year after year increased profitability and stockholder return on investment. Third, the CEO must be able to develop others - more specifically, the CEO must develop/groom their replacement. Significant leadership studies have found there is a shortage of corporate leaders. Corporate boards "incent" CEOs to develop a CEO successor in order to ensure long-term corporate leadership continuity and potential stability. This third skill has become an important part of the CEO role and their bonus pay.

All of the components of CEO salary and incentive are not typically shared. There are other factors that could be included. Further, the amount or percentage of CEO bonus pay attached to any of these activities is not public knowledge as well.

Whereas the concepts of incentive pay and bonuses for good corporate performance is viable, there is no justification for multi-million dollar bonuses for poor corporate performance. An initial prescription for resolution is to re-structure CEO bonus pay with a significant portion of the incentive pay based on corporate performance. In today's era of instant gratification, corporate profitability is the ultimate measuring stick. Hopefully, such a pay restructuring will provide CEOs who are in a tough spot to begin with (regardless of compensation) the environment to effectively carry out the other vital, critical functions of their role.

More information on the role of the CEO and the corporate board of directors can be found in Corporate Leadership Selection: Impact on American business, employees, and Society. As always, feedback and input to this blog is welcome.

Dr. Reginald J. Gardner

Whats UP (Weekly, Hot, Applicable Topic Summary - Unbiased Perspective)

U.S. Government Stimulus for U.S. Corporations - Will it Work? During the Summer 2008, signals of a faltering U.S. economy intensified. According to national reports, unemployment rates increased; housing starts and auto sales decreased; stock prices plummeted; and Fortune 100 corporations traveled to Washington, D.C. in search of federal financial assistance. Questions and debate focused on whether the government should help these companies that arguably constitute the backbone of the U.S. economy; how will these companies use federal funding; and will investing taxpayer dollars in these companies be effective. This week's blog entry addresses the question: "Will a federal economic stimulus package work?"Economists and Financial Analysts' Perspective Highly regarded economists, financial analysts, and researchers have consistently (uniformly?) stated they are unsure if an economic stimulus package will work. I have the utmost respect and trust in those who have admitted uncertainty around this issue. I am also extremely encouraged that our government has acted swiftly to take action on behalf of its citizens. I have no economic or financial research data to question their judgment. However, based on my research, experience, and observations, I can address why the economic and financial experts are unsure. Diagnosing the symptoms and prescribing a remedy for high unemployment, or low stock prices, or fluctuations in the Gross National Product (GNP) is a science. Understanding what a corporate leader (or civic leader, or individual citizen for that matter) will do with federal financial assistance is not. There are a variety of behaviors and attitudes that will enter the equation in determining the "optimal" use of financial stimulus dollars.The Economic Stimulus Package Objective The economic stimulus initiative is a 3-pronged approach intended to rejuvenate the U.S. economy. First, stimulus dollars have been given to states, cities, and municipalities to improve public services (i.e. health care, education programs, police service, streets and sanitation, roads, bridges, etc.). Providing economic stimulus for this initiative has a high probability of success. What civic leader/politician wants the reputation of mis-managing federal funding to improve their communities in light of the current economic scenario? Second, stimulus dollars have been given to U.S. citizens in the form of tax breaks or tax refunds. The expectation is that recipients will spend their dollars to help boost a sagging U.S. economy. Undoubtedly, there will be a mixed bag of individual behavior and attitudes. Some will save; some will pay off debts - specifically credit card debts; some will indeed go out and spend. Every individual case will be different, and thus, there is room for uncertainty. The third, and most significant portion of the $750 Billion stimulus package has been given to ailing multi-billion companies. Despite the good intentions, this part of the economic stimulus initative may not work! And here's why: the objective of a corporation is to make a profit and deliver a favorable return on investment (ROI) for its shareholders. No corporation that requested and recieved federal stimulus money is going to use that money on any expense-related activity that adversely impacts their bottom line. Some way, somehow, this money will be reflected in the company's annual reports and demonstrate their profitability. Ponder this - is there any corporation out there who wants to report to their shareholders that they received millions of dollars in stimulus incentive, yet, still had an operating loss for the year?Corporate Behavior and Activity with Federal Stimulus The following examples summarize diverse corporate behavior, attitudes, values, and activity with federal stimulus money. In an effort to keep this discussion and data as a positive analysis, no corporate names are listed. The objective is not to paint a negative picture of U.S. corporations, but to highlight what may have led to success of some companies and failure of others.
One highly successful bank recieved federal funding - and bought/acquired another bank;
It has been reported that lending institutions who recieved federal stimulus have been "slow" to resume lending activity to its customers, but the lending institutions' cash reserves are quite high;
One automotive giant received an economic "bailout" (as opposed to an economic stimulus). This money was needed to maintain operations and prevent a total collapse of the corporation, and possibly the entire U.S. auto industry. This automaker has since returned to Washington, D.C. in search of additional economic bailout assistance. In spite the good intentions, economic stimulus, bailout, or any other terminology we use for helping U.S. corporations has not provided the desired results - yet! The intent of this week's blog entry is not to paint a negative picture of the economic stimulus initiative or U.S. corporations, but to offer a glimpse of the corporate mission and objectives, and the behaviors, attitudes, values and expectations of those chosen to lead. More information on corporate leadership can be found in Corporate Leadership Selection: Impact on American Business, Employees, and Society (Authorhouse Publishing). Feedback to the weekly blog entry is always welcome.