The Tail Wagging the Dog

Originally published August 2009. 

In her July 27, 2009 Wall Street Journal article titled “U.S. Pay Czar to Rework Contracts Deemed High”, Deborah Solomon says: “The role of the government in setting pay is reaching a pivotal moment. Seven banks and industrial companies that received significant bailouts must submit proposals for their compensation packages by Aug. 13: Citigroup Inc., Bank of America Corp., American International Group Inc., General Motors Co., Chrysler Corp., Chrysler Financial and GMAC Financial Services Inc.” 

Missing from most if not all of the discussion surrounding this issue is an acknowledgement of the business cycle in which these troubled companies find themselves.  The fact that these firms are part of the government bailout is a big hint.  They are “troubled companies.” In our lingo that business cycle is called “turnaround.” And, perhaps the most important consideration when developing a compensation program for a turnaround company is that the right compensation structure tends to be counter-intuitive.

The following are simple examples of what is a highly specialized area of compensation design:

First: Remove at least 90% of the individuals from annual incentive plans. Why?  (It’s not just the cost saving, although it doesn’t hurt.) These misaligned incentive programs have caused many people to be running hard in the wrong direction for some time. 

Second: Throw out the calendar. For the very few employees that remain on incentives, create business cycle incentive plans of varying lengths. Why? Turnarounds don’t fit nicely into 12-month cycles. Initially, the company may be hoping to survive for just the next 3 to 6 months, as time goes on the “survival period” lengthens. The goal: pay incentives more frequently but match them to the length of the time frames for critical success or survival factors.

Third: Get rid of all stock options. Too many troubled organizations award boatloads of stock options in an effort to “retain and motivate key talent”. Use only performance based restricted stock. Why? A turnaround company doesn’t need gunslingers with short term solutions which result in short term gains that are quickly lost. Most turnaround companies find themselves in this condition because their business strategy is broken not bent. The executive team needs long term “ skin in the game”.

Fourth: Create a challenge grant with a milestone based on success factors. Why? No one can really do is predict when the company will be restored to health, so set a date that a reasonable person would believe the task to be accomplished and then determine the award (preferable a large number of shares) based upon the time frame, not the degree of success. Here’s the point:  it is easier to define success than it to define when success will be achieved. 

We could go on and on, but suffice it to say “turnaround rewards are counter intuitive” so throw the standard rewards play book out the window, or perhaps better yet, turn it upside down and read it from bottom to top.

Also in her article, Solomon quotes Andrew Williams, a Treasury Department spokesman as saying: “Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk-taking and reward performance for their top executives.” True, but it’s not just a balance between risk taking and reward that will return those companies to stability and profitability.  It was most likely a combination of poor business strategy and misguided employee behavior that created these companies’ problems.  It is also likely that their rewards programs reinforced the behaviors that brought about their near collapse. Fixing compensation first (or fixating on compensation) might just be the proverbial tail wagging the dog. And if we all want those “dogs” to live long and happy lives, then the first step is to review and revise their business and people strategies.   

As Grahall’s Michael Graham outlined in his recent blog “UPDATE: Goodbye GM…. Helloooooo GM!”, companies in turnaround situations need new business AND new people strategy models. IF (emphasis intended) these companies can develop new business and people strategy models (not the same model downsized), then they have a chance to compete successfully. 

To ensure that the new business and people strategies are understood and followed, these turnaround companies will need a new reward strategy that accomplishes two things: it reinforces desired behaviors during the turnaround phase, and aligns the efforts of the workforce as they strive to once again become successful enterprises.

A Total Rewards Strategy (TRS) markedly different from the one which the company used when it got  into trouble facilitates most, if not all, successful turnarounds.  The Total Rewards Strategy reinforces behaviors required for the business strategy to be successful. So when a company changes its business strategy (as these companies must), they MUST also change their TRS to ensure that executives and employees are working together to propel the company in a new direction, not the disastrous old one.

There are three distinct phases of any turnaround situation – and for each phase a general rewards strategy:
– In Phase 1, the organization designs and implements its new turnaround business strategy and aligns a rewards strategy for key decision makers to support its new business strategy
– In Phase 2, the organization reacts favorably to the new business strategy and begins the turnaround. Rewards strategies are adjusted to better support the changing business strategy. Selected groups of employees are added to the reward program.
– In Phase 3, the company has turned the corner and entered the growth stage.  Now the organization should focus the reward program on long-term goals that align with the new business strategy for growth.

Business and People strategies must change. Then Rewards strategies, including the compensation strategy, can be aligned with these new directions to ensure the company’s transformation into a new and successful enterprise.