Do Executive Bonuses kill Breakthroughs?

Hope you all had a good Thanks giving!!

Professor Henry Mintzberg of McGill University recently published a paper that caught my eye. First published in Sloan Management Review , and picked up by the Wall Street Journal, it’s a controversial idea: Do away with Executive Bonuses!

He points out that bonuses drive the wrong behavior. There’s lots of attention on figuring out how to fix the problems by redesigning the bonus structure. But bonuses rest on three faulty assumptions that make any fix impossible, Prof Mintzberg asserts. First is that a company’s health is represented by its stock price. He simply does not buy the well accepted argument that a firm’s stock price captures full information. Company culture, brand name, commitment to people, and other aspects of corporate ‘goodwill’ are not reflected in the daily ups and downs of the market. Stock price as full information may even encourage abusive decision making on the part of CEO’s…cost cutting, downsizing experienced employees, overworking those who remain, cutting back on customer service, etc.

Second, there’s the fallacy that performance measures, short or long term, represent the true strength of the company. Obviously not, as we know from cases like Enron, AIG, Merrill Lynch, etc. etc. etc. And, it’s impossible to assess the long term performance of a chief executive. Over how many years should we assess it? What, exactly, does long term mean?

Finally, there’s the assumption that those who get bonuses are the ones responsible for the company’s performance. How is this possible? How about the person in the lab? Or the account manager who goes the extra mile on a customer’s behalf? ???? Mintzberg points out that many, many influences, including the weather, affect a company’s performance. How divisive is it to pay some and not others, when teamwork is all the rage and “our people are our most important asset”? The class structure this imposes on a company all but ensures that the firm, as a whole, will not perform to its potential. It’s too discouraging as an employee.

Well said, professor. But not enough said. As challenging and confrontational as these thoughts are, it’s even scarier when we think about the impact of executive compensation on breakthrough innovation initiatives in companies. Why would a CEO invest to build such a capability, when we know that it takes time to bear fruit, that time horizons are long and success on any single project is uncertain, and that much of what is gained in striving for breakthroughs is immeasurable? Any time we bring a group of innovators together at RPI, at the Industrial Research Institute, or in the myriad other workshops we attend, the subject migrates to this topic. It’s the elephant in the room.

Other academics are beginning to demonstrate links between investment in major innovation and firm stock price. We have to. Otherwise it’s a non-starter. But you know, I like Professor Mintzberg’s approach better. He suggests firms use executive bonuses as a screening tool for hiring senior leadership. Those candidates for the job who insist on a bonus package should be screened out. Wow. Can you imagine the impact on firm’s investments in innovation?????

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