Incentive Pay

There is a chapter in my book titled “Incentive Pay”. I wrote it back in 2005, or so. Incentive pay made no sense to me then and makes no more sense to me now. In the intervening years, though, the public outcry against these vehicles of fortune has grown steadily louder. Why? Well, let’s take a look at that, but allow me a short look back at words previously penned.

Most of us have a job of some sort that pays us for our labor. The pay keeps us toiling away in our chosen field. So our pay is the incentive to our continued effort. Hence, incentive pay! Each of us, theoretically, does our best to bring fame and fortune to our employers. That effort results in our continued employment, theoretically, and a slice of that fortune. Your doctor receives nothing extra for a successful operation nor does your airline pilot receive additional compensation for an uneventful flight. Likewise, an attorney receives a given fee for services rendered, regardless of the legal outcome. To provide extra money for a job well done is ludicrous. “An individual should simply be paid what they’re paid,” I wrote. “At the end of the year, or season, a look back at the successes may warrant a bonus. So be it, but if we’re going to take a “look back”, we’re obligated to take note of failures, too. And failure should result in a reduction of that wage just as success raised it. Now there’s incentive!”

It seems that, as of late, hefty sums have been granted to executives who have performed less than admirably in steering their companies through troubled waters. Rewarding failure, in other words. The underlying mentality of this type of behavior is intriguing as well as disgusting. I submit an unholy alliance exists between upper management and their respective Board of Directors. This is cozy relationship couched around the “I’ll wash your back if you’ll wash mine” mantra. The Board continues to receive perks and payment from a management team that continues to receive incentive bonuses and golden parachutes from the Board. Pretty neat, huh?

Add to this mix the fact that corporate loyalty is no longer practiced, and we end up with a strong company slowly drained of its life-blood by a group uninterested in any long term viability. Take the money and run to the next outfit hungry for your corporate acumen. I’m reminded of old vampire movies.

While the providing of incentive pay is nothing new, why, then, has society become only recently agitated? Well, in better times it seemed that all boats were rising. Corporate bonuses of ever increasing amounts were accepted because, after all, everyone was doing better. Weren’t they? Hell. no, they weren’t. The middle class was enveloped in a fac̢ade of home equity loans and ever increasing debt loads to maintain their lifestyle. Buy now...pay later...sell the house...make a shitload of money...don’t worry...be happy.

Today, as the sham of affluence is rapidly being pulled away from many households, the aforementioned middle class is realizing that the fortunes of CEO’s and their ilk were gained at the expense of the worker bees who, in reality, were not in a boat that was rising at all. Falling home values, job insecurity, and large credit balances have combined to create a financial miasma for many who just recently thought they were doing OK.

So now it’s not OK for the corporate nabobs to continue reaping huge rewards. It was probably never OK, but society’s resistance has finally spilled into the streets and executives are being held to the same standard as everyone else. This is a good thing, but long overdue. Countless folks, families, and companies will fall by the wayside as a testament against the “greed is good” tenet of Gordon Gecko. One caveat: do not unilaterally hold higher salaries against those that earn them. Rather, make sure those higher returns reflect honest gains in profitability instead of smoke-and-mirror machinations that eventually collapse upon the backs of the true producers.

If we hold any interest in any company, whether through active sweat equity or investment, we are obligated to hold the respective Board of Directors and management teams to high standards and renewed scrutiny. They will resist, to be sure. Shareholder proposals seeking greater control are routinely introduced and routinely defeated. But the margin of defeat is narrowing and the time is at hand where future proposals may well emerge victorious from annual shareholder meetings. A brave new world? Perhaps. But a better balanced one, without a doubt.