Financial Pheromones

Close your eyes and take a deep breath. Can you smell it? Try again. “Smell what?” you ask. Why, the smell of money. After all, there is nothing more important than money, is there? Why else would so few be receiving so much? In the economic turmoil of the past several years, we’ve become all too acquainted with the ever-burgeoning executive bonus. These additional payments, we are told, assure the corporation’s ability to attract the best and brightest business-types to their ivory towers rather than lose them to a potential competitor. Could someone please tell me how “best and brightest” is defined? And then, could someone tell me why many of these bonus paying entities are in such dire financial straights? Hell, if they’ve got the cream of the crop in their boardrooms, why aren’t they achieving a higher degree of success?

We all know, on some level, that this rationale is nothing but a gimmick to explain away rewarding a small faction with very large sums regardless of their performance. Plain and simple, but how do we move away from this construct? First, we have to accept the basic premise as false and here’s a place to begin reconnecting with reality:

We all have a given quality of life. Some of that quality is due exclusively to the numbers written on our paycheck while other parts entail more subjective components: working conditions, geographic location, neighbors, proximity to family members, schools, and the like all add in to the mix that ultimately creates our level of satisfaction with that quality. Would you move across the country for a 10 % raise? Perhaps, if other factors appeared to be more favorable. You might even take a pay cut to get to a better position with a better future in a better area, wouldn’t you? And it goes without saying that many of us would find a way to go anyplace and work for anybody if offered a substantial raise. But not all of us and maybe not even most of us.

“You can’t buy happiness” is an appropriate adage to introduce at this juncture simply because it is true. Unless, of course, you see money as a pathway to every possession that, in theory, will make you happy. There’s a few lottery winners out there that might fall into this category, but most of us define our quality of life in more diverse terms. As a result, bonuses to attract the best possible executive should be unnecessary if the whole package offers a great opportunity.

And what about the best and brightest employees? Where are the bonuses to bring in the best auto workers, or municipal clerks, or doctors, or airline pilots, or anything else? Don’t we need the brightest and best on every step of the corporate ladder? It would seem so since many companies are floundering with supposedly exceptional leadership.

How about letting these would-be corporate wizards test the job market out there and see how desirable their skill sets are? Do you really believe most executives would leave a great job at a great company if their bonus were to disappear (or at least diminish)? I don’t, but it’s high stakes poker and the suits are not only dealing, but they can see everybody else’s hand. The shareholders fold and the rest is financial history. The Board of Directors? Nah, they’re in on the scheme and hang on to their perks only so long as they enable the largess flowing to the management teams.

How about embracing the idea that money, while important, is not the be-all and end-all in the boardroom or the trenches?Once we realize that the smell of money is not all that intoxicating, we can start to reshape corporate philosophy through specific shareholder resolutions and, in the meantime, refusing to blink when threatened with the departure of some omnipotent, omniscient CEO.

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.