Why *Mintzberg believes incentives should be scrapped
Management guru Henry Mintzberg believes that executive bonuses should be scrapped altogether. “This may sound extreme,” he notes, “but when you look at the way the compensation game is played – and the assumptions that are made by those who want to reform it – you can come to no other conclusion. The system simply can’t be fixed. Executive bonuses – especially in the form of stock and option grants – represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy. Get rid of them and we will all be better off for it.”
He lists five reasons why senior executives have failed their organizations.
1. They play with other people’s money – the stockholders’, not to mention the livelihoods of their employees and the sustainability of their institutions.
2. They collect not when they win so much as when it appears that they are winning – because their company’s stock price has gone up and their bonuses have kicked in. In such a game, you make sure to have your best cards on the table, while you keep the rest hidden in your hand.
3. They also collect when they lose – it’s called a “golden parachute.” Some gamblers!
4. Some even collect just for drawing cards – for example, receiving a special bonus when they have signed a merger, before anyone can know if it will work out. Most mergers don’t.
5. On top of all this, there are chief executives who collect merely for not leaving the table. This little trick is called a “retention bonus” – being paid for staying in the game!
Is Mintzberg right?
The evidence that incentives lead to higher profit performance is tenuous at best.
Jensen and Murphy showed that there was virtually no link between how much CEOs were paid and how well their companies performed for shareholders. Of the 12 companies employing the highest-paid CEOs in America, only four outperform their peers in terms of shareholder return.
A study by McKinsey found an inverse correlation between top executives’ pay and innovation. They suggest that the secret of persuading people to focus simultaneously on developing new businesses and managing current operations may be to rely less on pay for performance.
In an adaptive organization:
• Assume that people are motivated by self-fulfillment, not financial incentives.
• Base rewards on teams rather than individuals.
• Evaluate and reward team performance “with hindsight.”
• Give everyone a stake in success.
• Take employee recognition seriously.
Nothing undermines the best intentions of an adaptive organization like a misaligned or ill-thought-out method of evaluating performance and rewarding people. Rewards should be disconnected from fixed targets and based on a fair, open, and agreed formula underpinned by relative performance measures. Many reward systems carry a great deal of “excess baggage” from a company’s history.
They are notoriously difficult to change. But change they must if an adaptive organization is to become a reality. The best approach is for a senior team to thrash out a set of common principles to which everyone can agree. A combination of group-wide and team-based rewards based on relative performance seems to be the way forward. Perhaps the secret of motivation is to make everyone believe that the job they do is important.
As Herzberg once said: “If you want someone to do a good job, then give them a good job to do.”
A quote from Jeroen van der Veer, former CEO, Royal Dutch Shell:
You have to realize: if I had been paid 50 percent more, I would not have done it better. If I had been paid 50 percent less, then I would not have done it any worse.
* Henry Mintzberg is a consistently contrary Canadian academic and professor at McGill University in Montreal.
Trevor Lee, EP International
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