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Posts Tagged ‘compensation’

What motivates? It isn’t always money…

July 26th, 2010 Comments off

Here is the YouTube video I mentioned in class last week that discussed motivational levers in companies.  Given that we’ll be talking about compensation in the next couple weeks, this provides a nice backdrop to those discussions.

Wall Street: Inside the Collapse – 60 Minutes

March 15th, 2010 Comments off

60 Minutes ran an interesting piece last night featuring Michael Lewis, the author of a book called The Big Short set to be released this week.  One of his contentions touches on something we discuss to varying degrees throughout the course: the behavioral aspects of business and incentives.  His feeling (which seems to be strongly supported) is that Wall Street companies and individuals within those companies are given such incentive to produce short-term results (which result in big bonuses to the employees) that they do not consider the long-term implications of their actions.  And the fact that the government bails out people that make poor decisions increases the moral hazard that this behavior will continue.

Asked what happened, Lewis said, “The incentives for people on Wall Street got so screwed up, that the people who worked there became blinded to their own long term interests. And because the short term interests were so overpowering. And so they behaved in ways that were antithetical to their own long term interests.”

“Wall Street is able to delude itself because it’s paid to delude itself. I mean one of the lessons of this story is that people see what they’re incentivized to see. If you pay someone not to see the truth, they will not see the truth. And, Wall Street organized itself so people were paid to see something other than the truth. And that’s one of the central messages of this story. You have to be very careful how you incentivize people, ’cause they will respond to the incentives,” Lewis explained.

You can read more at CBS News: http://www.cbsnews.com/stories/2010/03/12/60minutes/main6292458.shtml

Or watch the two-part video I’ve embedded below.


Watch CBS News Videos Online


Watch CBS News Videos Online

View From Hong Kong: Lessons From Singapore on Bank Bonuses

January 26th, 2010 Comments off

We’ll get into compensation strategies at the very end of the semester, but this article is illustrative of the kinds of approaches companies, in this case banks in Singapore, are taking to better match pay with performance and with the idea that people need to take a longer view when it comes to things like bonuses.  If you focus bonuses on short-term results you end up getting short-term thinking. That concept isn’t revolutionary but it does seem to be one that has gone by the wayside in many different industries the last several years.

The View from Hong Kong: Bonus Plan? Take a Look At Singapore. Peter Stein. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 25, 2010. pg. C.3

A Better Way to Fix Bankers’ Pay

November 14th, 2009 Comments off

sb-t-sb_logo_mainHere is  a thoughtful article discussing the benefits of linking risk, performance, and compensation.  In order to prevent banking collapses in the future there needs to be goal congruence between the managers and the companies so that managers are not pursuing goals to earn higher pay that turn out to be bad for the firm.  Of course this should have always been a goal but it seems that things got out of whack and that, at least partially, is why the financial system experienced such chaos in the last year.

The implicit response seems to be that they were distracted by their greed. According to this view, these villains exploited the financial system for their own gargantuan end-of-year bonuses, got bailed out, and have every reason to do it again. Given this inherent moral hazard, it’s no wonder that so many political leaders in the U.S., Europe, and elsewhere are eager to rein in bankers’ compensation.

The moral hazard is a real concern. But the plans to limit compensation will not work, because they do not address the core problem: the disconnect among bank capital, risks (borne by both banks and society), and compensation structures (particularly the way traders are paid). If the financial leadership of the Group of 20 (G-20) can follow a “triangle principle” — building a tight regulatory connection among those three factors, making them interdependent at a granular level — they will get closer to mitigating the moral hazard. And they won’t have to regulate bonuses directly.

A Better Way to Fix Bankers’ Pay. Instead of bashing bonuses, let’s put in place the incentives we need: linking compensation to risk and capital. Shumeet Banerji. strategy+business. November 2, 2009.

Engagement is Key to Meeting Strategic (and, therefore Financial) Goals

August 6th, 2009 Comments off

Throughout the course of Acct 320, we come back time and again to the Balanced Scorecard model and the idea that improvements internally in things like employee relations and internal business processes eventually “bubble up” to improve the customer experience and the financial measures of a company.  Reinforcing that concept is a great piece that I found today at chiefexecutive.net that focuses on employee engagement and the impact that improving it can have on a company’s bottom line.  The article specifically mentions Best Buy in an example of this concept.

Best Buy was able to demonstrate that an increase in engagement among its store employees of 0.1 percent on a 5 point scale resulted in an annual profit increase of $100,000 for their store. If you really believe that your employees are the lifeblood of your company then your employees are an integral part of your brand equity.

In fact, employee engagement can be a piece of the puzzle in terms of differentiating your company/product from that of others.  As I have mentioned in class, with the vast amounts of information available to us as consumers via the internet, nearly every product trends toward becoming a commodity.  Something needs to be done to stand out in this environment so that you are able to charge the premium necessary to have brick-and-mortar operations when companies operating in the virtual world obviously have lower costs…employee engagement can help with that.

Aren’t you interested in growing the value of your customers, and in so doing increasing profitability? Engaged employees make a positive contribution to the bottom line. Disengaged employees with no emotional connection to the business or the customers negatively impact profitability.

The internet has created a global marketplace where much of what businesses produce can be commoditized. Today customers are just a click away from access to a number of alternatives if they are unhappy with a brand experience. In addition, social networks and blogs allow unhappy customers the ability to broadcast their unhappy experiences to consumers around the world.

Read more of this excellent piece including some discussion about aligning compensation with strategy at the link below:

The CEO’s New Strategic Imperative – Engagement

Targeting Supply Chain for Savings & Revenue Growth

August 6th, 2009 Comments off

This article uses the term “supply chain” but I think the concepts are just as valid in terms of the “value chain” principles that we discussed in class.  Working outside the legal framework of our own organization is one of the main ideas behind the importance of value chains and Cricket Communications, the company profiled in this article, is a perfect example of the benefits that can be gained by doing so.  One of the things I found most interesting was that this piece pointed out the importance of aligning compensation of employees with the strategy to make sure that there is goal congruence.

One of the biggest innovations reached all the way to the end customer. Analysis revealed huge hidden costs in Cricket’s “reverse logistics” process, through which phones are returned for replacement and repair. The main problem was a mismatch in incentives. Salespeople were rewarded for satisfactory customer transactions. If an out-of-warranty phone broke down, the sales rep found it hard to tell the customer that he or she was simply out of luck. So the rep accepted the phone for repair and the customer received a new phone free of charge, with Cricket bearing the entire cost. Absent the innovation imperative, a rules-based solution might have been devised that brought costs under control but left customers even more dissatisfied. Instead, the team came up with a more creative solution, and acted quickly to implement it.

There are many good examples in the rest of the article.  I encourage you to check it out at the link posted below.

Debugging the Supply Chain. By Keith Buckley and George Appling.  strategy+business.  July 14, 2009.

Airline-Sector Woes Slam India’s Highflier

July 4th, 2009 Comments off

Another airline story from Asia, this time about Jet Airways from India.  Until a couple years ago, Jet seemed unstoppable.  They modernized air travel in India and enjoyed market share of nearly 50% in 2003, but it has since fallen to less than half that.  Uncontrolled costs and external factors have taken their toll and this article sums up a lot of things we have talked about in class including cost control, fixed vs. variable costs, quality/cost/time issues, competition, compensation and staffing issues, etc.

Airline Sector’s Woes Slam a Highflier. Daniel Michaels. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 2, 2009. pg. A.1

Compensation Plans & Risk Tolerance

April 19th, 2009 Comments off

In Chapter 23, we will briefly discuss compensation plans.  Different employees have different risk tolerances when it comes to their pay structure and employers are wise to not only know this but to take advantage of it.  An article from the Wall Street Journal last summer gives a real-world example of this.