Monday, November 30, 2009

No more executive bonuses!

I very much like the article in today's Wall Street Journal by Henry Mintzberg. I think he has the right idea. He sees the business firm as a community of people, and executives as leaders and members of that community. He also argues that the success or failure of a business can not be attributed to one or a few individuals with exalted titles. Under these conditions, bonuses can not be justified as in any sense deserved. Bonuses send the wrong message to employees, namely that their contributions to the firm don't matter. And bonuses create incentives for excessive risk-taking and short-term decision-making. It's better to loot the firm's intangible assets for short-term profit gains than to tend the business for a sustainable future.

Economists have a lot to answer for here, too. Once we began teaching that workers were interchangeable parts like machines, and just as replaceable, we opened the way for the idea that there is really only one person who counts in a business, and that's the CEO. While it may be a convenient way to model labor markets for some purposes, the unintended effects on business behavior, especially compensation practices, have been devastating. Not only the growing inequality of the American income distribution and American society, but also the modern wave of business scandals and the financial collapse of 2008 have their roots in this type of thinking. We need more people to say it out loud, as Prof. Mintzberg has.


Jaakko said...

What do you think of this opinion by John Ruskin:

"The natural and right system respecting all labour is, that it should be paid at a fixed rate, but the good workman employed, and the bad workman unemployed. The false, unnatural, and destructive system is when the bad workman is allowed to offer his work at half-price, and either take the place of the good, or force him by his competition to work for an inadequate sum."
John Ruskin

Jaakko said...

If, as Ruskin points out, the real function of the manager is to provide for the nation and to care for the employees, especially their character, then I think his argument runs, very high wages might in fact attract people who are most unsuited to such a job. As getting a stipend is not the proper end of the clergyman, so is the fee not the proper end for the manager. Indeed, as Jim Collins points out (in his best-selling Good to Great), the best leaders are those with ambition first and foremost for the company and concern for its success rather than for one's own riches and personal fame.