A Few Thoughts About Executive Bonuses

So now that we the people have given billions of dollars to financial institutions, the administration is talking about curtailing executive bonuses. If we have a financial stake in the results of these institutions, that’s not a good decision for us. If the institutions do well, we the taxpayers can be a big winner so we should want them to win.  I’m not saying that the current bonus system should be maintained. Absolutely not! Paying business leaders for piling up short-term financial wins only encourages manipulation and insures the eventual downfall of the institution. That’s how we got into this pickle.

 Robert S. Kaplan and David P. Norton published “The Balanced Scorecard” in 1992 and since then its teachings have been an important thought process for most businesses who want to insure long-term success. 

 The core of this school of thought is that there must be balance between focusing on short-term profit and investing for a longer strategic time period. There should be wins for all business’ stakeholders not just shareholders, but employees, business partners, and customers of the business. There must be balance between productivity and quality.  Any business can produce large amounts of a mediocre product, but making a first rate product takes a bit more effort.

 The key to insuring this balance is for each element to be carefully measured and economic rewards (bonuses) be made not for success only in one aspect of the business, but for balanced success. Simply, when you pay a CEO for attaining a short-term financial goal, it will most certainly do nothing for the long-term success of the organization. Kaplan & Norton would argue that you reward a balanced approach that recognizes the need for longer term success and represents the interests of all stakeholders, not just investors.

 So if we have a stake in the large institutions who we have “bailed out” to return to financial good health let’s not eliminate incentives, but rather let’s just insure that they are based on a balanced scorecard.  The American capitalism system thrives when success is rewarded financially. That’s a good thing, but let’s insure that the definition of success works today and tomorrow and that neither trumps the other and that innovation, quality, focusing on customer value and the employees and partners who make these possible are all included.

This entry was posted on Monday, November 16th, 2009 at 7:44 pm and is filed under What's important here. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.