We expected to find that changes in incentive systems, especially executive incentives, would be highly correlated with making the leap from good to great. With all the attention paid to executive compensation – the shift to stock options and the huge packages that have become commonplace – surely, we thought, the amount and structure of compensation must play a key role in going from good to great. How else do you get people to do the right things that create great results?
We were dead wrong in our expectations.
We found no systematic pattern linking executive compensation to the process of going from good to great. The evidence simply does not support the idea that the specific structure of executive compensation acts as a key lever in taking a company from good to great.
Where is this blurb from? Not from a left leaning economist or columnist but from the book Good to Great, written by former Stanford Graduate School of Business faculty member Jim Collins. How does this fit in the current brouhaha over executive compensation of bankers? We’ve been told by many smart people that these investment bankers, and traders, and myriad other professionals in the finance industry are the best and the brightest and that they need to paid very highly if you want to create winning companies. But that’s not what Jim’s data says. In the same section, Jim further elaborates:
Most importantly, when we analyzed executive compensation patterns relative to compensation companies, we found no systematic differences on the use of stock (or not), high salaries (or not), bonus incentives (or not), or long-term compensation (or not). The only significant difference we found was that the good-to-great executives received slightly less total cash compensation ten years after the transition than their counterparts at the still-mediocre comparison companies.
So what’s going on here? Who’s right and who’s wrong? Why do smart people keep claiming that bankers need to be paid those astronomical bonuses to keep them motivated when clearly, leaders in well managed, great companies did not? I can think of only one reason – the job of a banker does not have any built in job satisfaction, no reward for building a great product, no reward for improving the lives of other people, no reward for making people happier. After all, these people getting into the banking business are really smart, they have to be and they could have designed the next iPhone, discovered the next bio-tech breakthrough, created the next generation of hybrids. But they are busy creating credit default swaps, or collateralized debt obligations, or buying and selling stocks all day long. At the end of the day, what value have they created to bring them job satisfaction? That job satisfaction needs to come from somewhere – and that apparently comes from those outsized bonuses. If you cannot impress your girlfriend or wife by talking about what you did during the day, atleast you can impress her by ordering the most expensive wine at the restaurant. If your child cannot explain in front of his class what his or her dad does, then you can try to buy that disappointment with the most expensive toy.
And that in my opinion is the secret behind the banker compensation – the only way in which you can have really smart people commit to a life of CDSs and CDOs.
I stumbled upon your blog and felt like I had to reply to this one. To clarify, i’m not a banker and I don’t find anything appealing about the job either, but I do believe that everyone is born different and what is your definition of job sasfaction may not be someone else’s.
For you the innovation of the next smartphone and the next hybrid car may be very exciting. For someone else marketing those things may be more appealing. For another person selling those things may be rewarding. For yet another person bringing investors to take that product and build an international business around it may be the most interesting thing.
You may not readily see money as a traditional product – but it is in fact a product because it can be created. More importantly there are no limits to how much and how fast it can be created. I don’t see why that can’t be exciting and a satisfying job for for someone.
As far as big compensation goes, for some may value their job because it benefits others or gives them some sort of personal satisfaction, or has a element or creation and innovation. For others satisfaction may come from living in a big house, have nice cars, travel the world etc. So if a job can fulfil that need by giving you the money that makes those things more accessible, then why can’t compensation itself be the satsfying component of a job?